1.4.1- Government Intervention In Markets

Question 1

Why do governments intervene in the market?

Answer 1

To correct market failure

Question 2

What is the aim of indirect taxes?

Answer 2

To internalise the externality

Question 3

What is the diagram like for an Ad valorem tax?

Answer 3

Supply shifts and curves in

Question 4

What does the diagram for a specific tax look like?

Answer 4

Parallel shift in supply

Question 5

What are the advantages of an indirect tax?

Answer 5

-internalises the externality, so the market produces at the social equilibrium position
-raises gov revenue to solve the externality
-requires less enforcement
-increases prices so less likely to buy
-incentive for producers to reduce pollution

Question 6

What are the disadvantages of indirect taxes?

Answer 6

-difficult to know the size of the externality so it’s difficult to set the tax
-could lead to the creation of a shadow market
-ineffective if price inelastic
-taxes are unpopular
-regressive so affect the poor more

Question 7

What is a maximum price?

Answer 7

A legally imposed price for a good that suppliers can’t charge above

Question 8

What type of goods are maximum prices used for?

Answer 8

Positive externalities

Question 9

What are some examples of maximum prices?

Answer 9

-rent controls
-energy price caps
-cap on interest rates charged by pay day lenders

Question 10

What are the advantages of a maximum price?

Answer 10

-enables consumers on low incomes to afford a product
-helps prevent an increase in inflation
-can prevent exploitation of consumers by monopolies

Question 11

What are the disadvantages of a maximum price?

Answer 11

-danger that shortages mean some consumers are unable to find supplies of the product
-producers may exit the market to make goods more profitable
-reduces a firms profitability, leading to less investment
-could create an unofficial market

Question 12

What is a minimum price?

Answer 12

The legally imposed price at which the price of the food can’t go below

Question 13

What types of goods are minimum prices set on?

Answer 13

Goods with negative externalities

Question 14

What are some examples of minimum prices?

Answer 14

-minimum wage
-alcohol

Question 15

What are the advantages of minimum prices?

Answer 15

-producers know in advance the price they will receive for their product
-greater certainty allows producers to plan investment + output
-can prevent exploitation of producers by wholesalers + retailers

Question 16

What are the disadvantages of minimum prices?

Answer 16

-if it’s set to high, there will be surpluses
-involve costs of storage, which must be borne by taxpayers
-encourages overproduction and may result in inefficient allocation of resources
-difficult to set prices

Question 17

What level do governments want goods to be set at?

Answer 17

MSB= MSC

Question 18

What are some examples of government regulation?

Answer 18

-ban on production of the good or provision of the service (minimum school leaving age)
-regulations that place limit on the production process (fishing quotas)
-regulations relating to the consumption of the product

Question 19

What are the advantages of regulation?

Answer 19

-regulations can limit pollution
-may act as an incentive to develop new technology
-can limit external costs without impacting price

Question 20

What are the disadvantages of regulation?

Answer 20

-enforcement costs
-problem of determining the socially efficient level of pollution
-limits consumer sovereignty

Question 21

What is a subsidy?

Answer 21

A payment from the government to a producer to lower their costs of production and encourage them to produce more