1.4 - Government intervention

Question 1

What are indirect taxes?

Answer 1

Taxes on expenditure.

Question 2

In which direction do indirect taxes cause the supply curve to shift?

Answer 2

Left.

Question 3

What may indirect taxes be used to deal with?

Answer 3

External costs.

Question 4

What are 3 advantages of indirect taxes?

Answer 4

Incentive to reduce pollution.

Source of revenue for the government, this can be used to compensate for those affected by the pollution.

Few administration costs.

Question 5

What are 3 disadvantages of indirect taxes?

Answer 5

Ineffective in reducing pollution if demand is price inelastic.

Difficult to set a price of tax because external cost is hard to quantify.

Increased business cost.

Question 6

What is a subsidy?

Answer 6

A grant from government that reduces businesses production costs.

Question 7

In which direction do subsidies cause the supply curve to shift?

Answer 7

Right.

Question 8

What are 3 advantages of subsidies?

Answer 8

Reduction of costs of production enabling supplier to decrease prices.

Incentive for people to increase consumption.

Can reduce inequality.

Question 9

What are 3 disadvantages of subsidies?

Answer 9

Costs to the taxpayers providing the subsidies.

Ineffective in increasing consumption if demand is inelastic.

Difficult to set a price of subsidy because external benefit is hard to quantify.

Question 10

What is a maximum price?

Answer 10

A price set by government which makes it illegal for firms to charge more than a certain price for a given quantity of a product.

Question 11

What are 3 advantages of maximum prices?

Answer 11

Enable consumers on low incomes to be able to afford a product.

Can help prevent inflation.

Can prevent exploitation of consumers by monopolies.

Question 12

What are 3 disadvantages of maximum prices?

Answer 12

Shortages could occur meaning some consumers may be unable to find a product.

Producers may leave the market due to a lack of profitability.

If government subsidises production to encourage output, there will be significant costs to taxpayers.

Question 13

What is a minimum price?

Answer 13

A price set by government which is guaranteed to producers.

Question 14

What are 3 advantages of minimum prices?

Answer 14

Producers know in advance they will receive for their product.

Greater certainty enables producers to plan investment.

They can prevent exploitation of producers by large retailers who have significant buying power.

Question 15

What are tradable pollution permits?

Answer 15

Permits issued by government that allow firms to pollute up to a certain level. Beyond this limit firms can be fined.

Permits can be traded between firms.

Question 16

What are 3 advantages of tradable pollution permits?

Answer 16

They are incentives for firms to reduce pollution.

Administration costs are low.

There can be a planned reduction over time.

Question 17

What are 3 disadvantages of tradable pollution permits?

Answer 17

Pollution is still occurring.

Large efficient firms might just buy up lots of permits and continue to pollute.

They need to be internationally enforced, or some countries goods could become less competitive.

Question 18

How may information be provided that can close information gaps?

Answer 18

Publications in the media.

Question 19

What are 2 examples of information that can be provided to close information gaps?

Answer 19

For parents encouraging them to get their children vaccinated against measles.

About the health risks associated with smoking eating junk food.

Question 20

How can regulations be placed?

Answer 20

By banning the production good or service.

By limiting the amount of a good or service that can be consumed.

By regulating the consumption of a product.

Question 21

What are 2 advantages of regulation?

Answer 21

Can limit the amount of pollution

Acts as an incentive to producers to develop new technologies that reduce pollution.

Question 22

What are 2 disadvantages of regulation?

Answer 22

There are costs involved in setting laws and inspections.

It is difficult to determine the socially optimum level of regulation.

Question 23

What is government failure?

Answer 23

Where government intervention leads to a net welfare loss.

Question 24

What are 4 causes of government failure?

Answer 24

Distortion of price signals - where manipulation of prices undermines the functions of the price mechanism to a degree where resources are not allocated efficiently.

Unintended consequences - where intervention leads to an unexpected result.

Excessive administrative costs - costs may outweigh the benefits of the intervention.

Information gaps - when government intervenes it does not have all the information it requires meaning some intervention can cause net welfare loss.

Question 25

What are 3 examples of government failure?

Answer 25

Indirect taxes - can result in smuggling

Banning smoking indoors - leads to heater being used outside causing greater pollution.

Minimum price guarantees - can cause large surpluses with high storage costs.