1.4 government intervention and failure

Question 1

what is a tax?

Answer 1

charges on individuals and organisations by governments

Question 2

what is the difference between an indirect and a direct tax?

Question 3

what are the two types of indirect tax?

Answer 3

specific tax
ad valorem tax

Question 4

what is the difference between the two types of indirect tax?

Answer 4

specific tax -
ad valorem tax -

Question 5

what is producer tax incidence?

Answer 5

the burden of a tax on the produer

Question 6

what is consumer tax incidence?

Answer 6

the burden of a tax on the consumer

Question 7

what is deadweight loss?

Answer 7

a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium

Question 8

what is a subsidy?

Answer 8

payments to producers by the government to reduce the costs of production

Question 9

160. Under what circumstance would tax burden fall mainly on the consumer?

Question 10

161. Under what circumstance would tax burden fall mainly on the producer?

Question 11

162. Explain in words why taxes result in deadweight loss

Question 12

Give 2 benefits of indirect taxes over other forms of intervention to correct a market failure

Question 13

Give 2 disadvantages of indirect taxes over other forms of intervention to correct a market failure

Question 14

give reasons why governments may wish to subsidise a product

Answer 14

-

Question 15

Give 2 benefits of subsidies over other forms of intervention to correct a market failure in a market of your choice

Question 16

Give 2 disadvantages of subsidies over other forms of intervention to correct a market failure in a market of your choice

Question 17

169. Explain in words why subsidies result in deadweight loss

Question 18

170. Under what circumstances would a tax generate a lot of government revenue?

Question 19

Under what circumstances would a tax result in a significant decrease in the quantity of the good consumed?

Question 20

Under what circumstances would a subsidy result in a significant fall in price for the consumer?

Question 21

Under what circumstances would a subsidy result in a significant increase in price for the producer?

Question 22

Under what circumstances would a subsidy result in a significant increase in the quantity of a good consumed?

Question 23

what is a minimum price?

Answer 23

price set by the government to prevent the market price from falling below a certain level; also known as a price floor

Question 24

give reasons why a government may wish to put a minimum price on a product

Answer 24

• to support the incomes and jobs of producers and encourage investment and innovation
• to discourage consumption of goods that are bad for social welfare
• to prevent consumers abusing any monopsony power they have at expense of suppliers

Question 25

does an unguarunteed minimum price cause a shortage or a surplus?

Answer 25

surplus

Question 26

if an unguaranteed minimum price is imposed, does a firm's revenue increase or decrease?

Answer 26

depends on the elasticity

Question 27

what is a guaranteed minimum price?

Answer 27

a legal price floor where the government buys up the surplus

Question 28

if a guaranteed minimum price is imposed, does a firm's revenue increase or decrease?

Answer 28

increase

Question 29

give a benefit of guaranteed minimum prices over unguaranteed minimum prices

Answer 29

certainty for producers

Question 30

give a disadvantage of guaranteed minimum prices over unguaranteed minimum prices

Answer 30

cost for government

Question 31

what is a maximum price?

Answer 31

the govenment or an industry regulator can set a maximum price to prevent the market price from rising above a certain level; also known as price ceiling

Question 32

give reasons why a government may wish to put a maximum price on a product

Answer 32

- to make necessities more affordable; reduce poverty/hardship - to encourage consumpton of merit goods - to prevent businesses profiteering at the expense of consumers

Question 33

what is a tradeable pollution permit?

Answer 33

where the government gives firms a permit which allows them to produce up to a set amount of carbon each year

Question 34

explain the benefits of tradeable pollution permits

Answer 34

- makes the polluter pay and internalises the externality - incentives the firms to lower their emissions and for consumers to change their behaviour - revenue generated can be spent on other envirnmental initiatives

Question 35

explain the disadvantages of tradable pollution permits

Answer 35

- problems determining the size of the tax - demand may be price inelastic so tax may have little impact on pollution - could cause a loss of international competetiveness - could be regressive - rise of tax evasion - countries may 'free ride'

Question 36

189. Explain 3 reasons why the government might want to provide goods

Question 37

190. Explain 2 disadvantages of state provision

Question 38

191. Explain a benefit of information provision

Question 39

192. Explain 2 disadvantages of information provision

Question 40

what is (‘command and control’) regulation?

Answer 40

a set of rules, normally imposed by government, that seeks to modify or determine the behaviour of firms or organisations

Question 41

194. What forms might regulation take?

Question 42

explain the benefits of regulation

Answer 42

- can ensure consideration of externalities - prevents exploitation of consumers - keeps consumers fully informed - helps overcome market failure

Question 43

explain the disadvantages of regulation

Answer 43

- laws may be expensive to moniter, incuring an opportunity cost - compared to tradable pollution permits, regulation is less efficient method of reducing pollution - government can suffer regulatory capture - firms may pass on costs to consumers - excessive regulation may reduce competition in the market

Question 44

what is meant by ‘government failure’?

Answer 44

when government intevention in the market leads to a misallocation of resources and a net welfare loss

Question 45

give the causes of government failure

Answer 45

distortion of price signals unintended consequences excessive administartion costs information gaps