1.4 GOVERNMENT INTERVENTION AND GOVERNMENT FAILURE

Question 1

i. What is a tax?

Answer 1

-A tax isa mandatory fee or financial charge levied by any government on an individual or an organization to collect revenue for public works providing the best facilities and infrastructure

Question 2

ii. What is the difference between an indirect and a direct tax?

Answer 2

-A direct tax isa tax that a person or organization pays directly to the entity that imposed it, whereas an indirect tax increases a firms cost of production but can be transferred to the consumer

Question 3

iii. What are the two types of indirect tax?

Answer 3

-Ad valorem and specific

Question 4

iv. Give 3 reasons why government might want to tax a product

Answer 4

-protecting nascent industries, fortifying national defense, nurturing employment domestically, and protecting the environment.

Question 5

v. What is the difference between the two types of indirect tax?

Answer 5

-A specific excise tax is levied based on quantity. Ad valorem excise is levied based on the value

Question 6

viii. Explain in words why taxes result in deadweight loss

Answer 6

-Taxes create deadweight loss becausethey prevent people from buying a product that costs more after taxing than it would before the tax was applied

Question 7

ix. Explain how taxes can be used to ‘internalise an externality’

Answer 7

The higher cost, then, better reflects the true cost of production because it includes the spillover costs of, say, pollution. So, such taxationattempts to make the producer pay for the full cost of production

Question 8

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

Answer 8

-Ease of collection

-Convenient to pay
-discourage the production of demerit goods

Question 9

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

Answer 9

-Can lead to inflation

-Tax on raw materials

Question 10

i. What is a subsidy?

Answer 10

-a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low

Question 11

ii. Give 2 reasons why governments may wish to subsidise a product

Answer 11

-lower costs of production

-increase output
-Promote certain industries

Question 12

i. What is a ‘tax incidence’?

Answer 12

-an economic term for understanding the division of a tax burden between stakeholders, such as buyers and sellers or producers and consumers

Question 13

ii. Under what circumstances would the burden of a tax fall more heavily on a consumer?

Answer 13

-When supply is more elastic than demand

Question 14

iii. Under what circumstances would the burden of a tax fall more heavily on a producer?

Answer 14

-when demand is more than supply

Question 15

i. What is a minimum price?

Answer 15

-A minimum price iswhen the government don’t allow prices to go below a certain level. If minimum prices are set above the equilibrium it will cause an increase in prices.

Question 16

ii. What is a guaranteed minimum price?

Answer 16

-a price agreed by a government which is paid irrespective of market conditions and the current market price

Question 17

iii. Give 2 reasons why a government may wish to put a minimum price on a product

Answer 17

-Consumers demand less

-discourage consumption

Question 18

v. Give 2 benefits of (unguaranteed) minimum prices over other forms of intervention to correct a market failure

Answer 18

-For example, the EU has used minimum prices for agriculture. It is argued farmers incomes are too low. Therefore, minimum prices have been used to increase prices above the equilibrium. This enables farmers to get a higher revenue

Question 19

vi. Give 2 disadvantages of (unguaranteed) minimum prices over other forms of intervention to correct a market failure

Answer 19

-The big problem is that this minimum price creates a surplus. Therefore, the government have to purchase the surplus to maintain a minimum price. The Common Agricultural Policy became very expensive because the minimum prices encouraged farmers to supply as much as possible.

Question 20

i. What is a maximum price?

Answer 20

-A maximum price iswhen the government don’t allow prices to go above a certain level

Question 21

ii. Give 2 reasons why a government may wish to put a maximum price on a product

Answer 21

-make consumption more affordable

Question 22

iv. Give 2 benefits of maximum prices over other forms of intervention to correct a market failure

Answer 22

-The government may wish to use maximum prices to reduce the cost of renting a house.

-The government may also use maximum prices for important food-stuffs or pharmaceutical drugs which it wants to make more affordable.

Question 23

v. Give 2 disadvantages of maximum prices over other forms of intervention to correct a market failure

Answer 23

-if the price is below the equilibrium, demand will be greater than supply leading to a shortage.

Question 24

i.What is state provision?

Answer 24

Direct provision of goods/services by the government free at the point of consumption

Question 25

i. How is state provision funded?

Answer 25

They usetax revenue which they receive from taxpayers’ to pay for these services.

Question 26

iii. Explain 2 benefits of state provision

Answer 26

-nobody is excluded from healthcare or education

-state provision fixes free rider problem

Question 27

iv. Explain 2 disadvantages of state provision

Answer 27

-costly

-excess demand

-imperfect information

-inefficiency of state organisations

Question 28

i. In what forms might the government provide information?

Answer 28

-advertising, education

Question 29

ii. Explain a benefit of information provision

Answer 29

-encourage or discourage consumption, (limit spending on alcohol, drugs or increase spending on healthy eating)

Question 30

iii. Explain 2 disadvantages of information provision

Answer 30

-costly

-no guarantee of success

-long run not short run

Question 31

i. What is (‘command and control’) regulation?

Answer 31

-Rule/Law enacted by the government that must be followed by economic agents to encourage a change in behaviour

Question 32

ii. What forms might regulation take?

Answer 32

-bans (smoking), age limits (alcohol), caps, compulsory, punishment

Question 33

iii. Explain a benefit of regulation

Answer 33

-Incentive to change behaviour

-solve issues in free market

-allocative efficiency

Question 34

iv. Explain 2 disadvantages of regulation

Answer 34

-costly (administrative costs and enforcement)

-setting the right regulation (too strict means unexpected consequences)

-black markets and unintended consequences

-equity

Question 35

i. What is meant by ‘government failure’?

Answer 35

-the costs of intervention outweigh the benefits

Question 36

ii. What are 4 types of government failure?

Answer 36

-information failure

-regulatory capture

-admin and enforcement costs very high

-unintended consequences

Question 37

indirect tax to solve market failure

Answer 37

its a tax imposed onto a firm in order to increase their cost of production, this will aim to internalise the externality by decreasing overconsumption and overproduction. This promotes allocative efficiency