1.4 Government Failure

Question 1

Why is government necessary?

Answer 1

1. Support firms
2. Correct Market failure
3. Collect government revenue
4. Reduce inequality

Question 2

What are some types of government intervention?

Answer 2

1. Advalorem taxes
2. Specific taxes
3. Subsidies
4. Minimum Prices
5. Pollution permits
6. Increase information (awareness campaigns)
7. State provision of resources

Question 3

Definition of Ad Valorem Tax

Answer 3

A tax that is a percentage of price (VAT)

Question 4

Definition of Specific Tax

Answer 4

A tax per unit of output (specific amount)

Question 5

What are the differences between market failure and government failure?

Answer 5

Market failure occurs when the market leads to outcomes that aren’t pareto optimal (can make one person better off without making anyone else worse off) while government failure occurs when government intervention in the economy leads to outcomes that are inefficient, inequitable, or damaging to public welfare.

TL;dr Market failure - market failure Government failure - government intervention fault.

Question 6

What are the types of government failure (4)?

Answer 6

1. Distortion of price signals.
2. Unintended consequences like subsidies leading to overproduction.
3. Excessive administration costs and regulatory capture
4. Information gaps

Question 7

Draw/Analyze graph for Ad Valorem Tax

Question 8

Draw/Analyze graph for Specific tax on Negative Externality of Production (oil firm)

Question 9

Draw/Analyze Specific Tax on Negative Externality of Consumption (cigarettes)

Question 10

Draw/Analyze subsidies on an industry (electric vehicles)

Question 11

Draw/Analyze impacts of(maximum prices) on housing/renting industry

Question 12

Draw/Analyze impacts of (minimum prices) on farming industry/minimum wage industry