1.3.2, 1.4.1 - externalities and government intivention

Question 1

Instruments of government intervention

Answer 1

Subsidy/ indirect tax - regulations/rules/laws

Tradeable permits - Government provision

Maximum or minimum price - provision of information

Question 2

Minimum price

Answer 2

The lowest price that legally can be charged for a good or service. Also known as a price floor

Question 3

Explain how minimum price can correct market faliure (alcohol)

Answer 3

Alcohol has a negative consumption externality, the introduction of a floorprice reduces consumpiton of alcohol, addressing overconsumption in the freemarket

Question 4

Disadvantages of a legal minimum price

Answer 4

• implementation + enforcement costs
• could lead to rise in informal market
• Difficult to known precise correct level of price to monitor comsumption

Question 5

maximum price

Answer 5

Is the highest price that can legally be charged for a good or service.

Also known as a price cap

Question 6

How can maximum price correct market faliure in the housing market?

Answer 6

Housing is unaffordable to many people resulting in inequality and lower living standards

Question 7

advantages and disadvantages of maximum price

Answer 7

advantage:
- Reduced price for consumers (more affordable)

disadvantage:
- causes shortages as less producers are willing to supply at these lower prices as less profit can be made
- creates large opportunity for informal market

Question 8

Free market allocation

Answer 8

• free of government intivention