1.4 Government intervention

Question 1

How do you draw a tax box onto a S and D diagram?

Answer 1

Tax box goes from new equilibrium down to new one
Draw this as whole tax box
Consumers pay price, producers pay the rest

Question 2

Complete market failure

Answer 2

no goods supplied in the market at all

Question 3

How do you draw a subsidy box onto a S and D diagram?

Answer 3

Subsidy box goes from new equilibrium up to new one
Draw this as whole subsidy box
Consumers pay price, producers pay the rest

Question 4

Partial market failure

Answer 4

over/ under production of goods

Question 5

How can governments intervene with markets?
Ad valorem taxes

Answer 5

Specific taxes
Subsidies
Max prices
Min prices
Regulation
Trade Pollution permits
State provision of public goods, by making people pay taxes
provision of information

Question 6

Specific tax

Answer 6

A tax expressed as a fixed value
Supply curves of before and after are in parallel

Question 7

Ad valorem tax

Answer 7

A tax expressed as a percentage
The higher the quantity, the higher the tax
Supply curves of before and after are not in parallel

Question 8

What can subsidies do to positive externality diagrams

Answer 8

The gov could give a firm a subsidy so they can operate at MSB instead of MPB to correct market failure

Question 9

How do elasticities effect taxes/ subsidies on supply demand curves?

Answer 9

The bigger the YED and smaller the PED, then the bigger the price difference
so more put on consumers
The smaller the YED and bigger the PED, then the smaller the price difference
so less put on consumers