13 Methods and Effects of Government Intervention in Markets

Question 1

Types of indirect taxes

Answer 1

• Ad valorem tax
• Specific taxes

Question 2

Ad valorem tax

Answer 2

Proportion or percentage of price charged by retailer

Question 3

Specific taxes

Answer 3

Form of tax in a fixed amount per unit purchased.

Question 4

Example of specific taxes

Answer 4

Tax fuel, tax based on measurable quantity such as per litre.

Question 5

Indirect tax

Answer 5

Tax levied on goods and services instead on an individual/company. It is usually used to discourage consumption of a demerit good.

Question 6

What are indirect taxes used for? How are these taxes passed on to consumers?

Answer 6

Indirect taxes are used to discourage consumption of demerit goods such as cigarettes. These taxes are passed to consumers by increased prices on goods.

Question 7

If a product is more elastic then who will pay more of the tax?

Answer 7

Producers. Consumers will buy less of the product as its price rises, resulting in the producer having to pay more of the indirect tax

Question 8

If a product is more inelastic then who will pay more of the tax? Give an example.

Answer 8

Consumers since it is not sensitive to price change. For example: car fuel, no matter how high the specific tax leading to higher prices, people will still buy it as it is inelastic and people need it.

Question 9

Incidence

Answer 9

Extent to which tax burden is borne by the producer, consumer or both

Question 10

Which level of economy struggles to collect taxes?

Answer 10

Low/Lower midde-income countries

Question 11

Subsidy

Answer 11

A financial aid by the government to the producers of goods and services. Usually comes out of tax revenue

Question 12

Subsidies are used for:

Answer 12

• Keep down market prices of essential goods
• Encourage greater consumption of merit goods
• Provide services that are not provided by the free market
• Reduce dependance on imports by paying subsidies to domestic producers of close substitutes.

Question 13

Examples of subsidies:

Answer 13

• Staple foods like rice, bread and cooking oil are subsidies in some low income countries. This is to provide relief for people who receives low incomes.
• Mass transit(public transportation) is heavily subsidised to give people(esp low earners) more chances to greater employment opportunities, provide social mobility for the elders, reduce road congestions & reduce pollution by road traffic.

Question 14

Maximum price

Answer 14

Price that is fixed, the market price must not exceed this price. Sometimes called price ceiling.

Question 15

What does the governments use maximum prices on?

Answer 15

• Staple foods
• Rents in certain types of housing
• Transport fares

Question 16

Why does the government use maximum prices on staple foods, rents in certain types of housing & transport housing?

Answer 16

Staple foods like rice, bread and cooking oil are subsidies in some low income countries. This is to provide relief for people who receives low incomes.

Mass transit(public transportation) is heavily subsidised to give people(esp low earners) more chances to greater employment opportunities, provide social mobility for the elders, reduce road congestions & reduce pollution by road traffic.

Rents in housing. By imposing maximum prices, rents in housing would be cheaper as the price cannot go over a legal limit. This gives a chance for low earners to still have proper shelter which usually leads to better health. This can give advantage to the economy as better health leads to better productivity in the workforce.

Question 17

Minimum price

Answer 17

Price that is fixed. Market price must not go below this price. Sometimes called price floor

Question 18

Government uses minimum price on:

Answer 18

• Imported goods where close substitutes produced by domestic producers are available.
• Wages in certain occupations, usually low skilled, to avoid employers exploiting their employees.
• Demerit goods
• Agricultural products. To provide a living income for producers. When there is excess supply, the government agency will buy the excess at minimum price.