1E

Question 1

What is Indirect tax

Answer 1

A tax levied on expenditure on G and S

Question 2

The burden of a tax

Answer 2

How the cost of a sales tax is shared between consumers and producers. i e who pays how much

Question 3

Polluter pays principle

Answer 3

Where those responsible for pollution should be made to pay the resulting costs.

Question 4

Indirect tax steps to MF

Answer 4

-Government adds an indirect tax to a good or service.
-Increase MPC
-Decreases supply-producers willing and able to supply less at every price.
-Increase P
-QD contracts
-Quantity traded is closer to socially optimum quantity
-Decrease in OC/OP
-fewer scarce resources are misallocated to the production of the decreased equilibrium quantity. increased AE.
MF reduced

Question 5

Evaluation of setting an indirect tax

Answer 5

-Difficulties in setting the correct size tax-hard to put a value on externality-so tax can be too small or too large.
-Inelastic PED might mean that consumption is not reduced as much as hoped.
-Tax may be avoided through the black market.
-Regressive taxes may hit consumers on low incomes harder.
-TAxes can be inflationary.

Question 6

What is a subsidy

Answer 6

A grant given by the government to producers to encourage production of a G or S.

Question 7

Subsidy steps to MF

Answer 7

• Government provides a subsidy to suppliers of goods/services.
  -Decreased production costs
  -Increased supply
• Decreased P
  -Extends QD
  -Quantity traded closer to socially optimum quantity.
  -UC decreased
  -AE increased
  -MF reduced.

Question 8

What is regulation

Answer 8

A rule set down by the government that firms/consumers need to operate within.

Question 9

What is prohibition

Answer 9

A ban on the sale of a particular good or service

Question 10

Examples of goods with regulation

Answer 10

Alcohol

Question 11

overall aim of regulation

Answer 11

To reduce market failure for goods with negative/positive externalities.

Question 12

Steps to MF eg allowed to drink increased to age of 21

Answer 12

-Government sets the regulation
-Reg=age allowed to buy and drink is increased to 21
-Penalty created to ensure behavior, e.g a fine
-Decreased consumers W and A
-Therefore D curve shifts left
-Reduced negative externalities
-MF reduced

Question 13

What is maximum price

Answer 13

The highest price that a good can legally be sold at

Question 14

Aim of maximum price

Answer 14

To encourage consumption by making goods more affordable or to control excessive prices from monopolies.
e.g-Medicine, food, housing

Question 15

What is minimum price

Answer 15

The lowest price that a good can be legally be sold at

Question 16

Aims of minimum price

Answer 16

Discourage consumption.
e.g alcohol, labour.

Question 17

Problems with minimum price

Answer 17

Surplus stock, black markets, inelastic PED for demerit goods means little change in QD

Question 18

What are pollution permit

Answer 18

A permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter.

Question 19

Pollution permit steps to MF

Answer 19

-Government sets total number of tradeable permits allowing pollution in an industry
- Firms buy permits(or allocated them for free)
-Firms can now only pollute up to the value of their permit.
-There is a penalty top ensure firms do no pollute above permit
-Govt now controls total amount of pollution from indutsyr at an acceptable level.
- -ve externalities from good are controlled.
-OP decreased within market
- Closer to QSO of good
-AE increased in goods market
-MF reduced

Question 20

What is an information gap

Answer 20

A lack of information about a product resulting in consumers and producers making decisions that do not maximize welfare.

Question 21

What is information provision

Answer 21

Government delivery of knowledge to consumers/ producers so that they are fully aware of social benefits.

Question 22

Information provision key steps to decreased MF

Answer 22

-Government provides information about negative externalities linked to a good/service
-Consumers were previsouly unaware of full extent of harm to themselves and society so were overconsuming.
-Consumers can now make fully informed economic decisions and change their behaviour.
-D shifts left
–Decrease in OC
-QD decreases and closer to QSO
- Increase in AE
-Decrease in MF

Question 23

What is direct provision

Answer 23

Government intervenes in the market and supplies the good/service to consumers

Question 24

examples of direct provision

Answer 24

national defence, NHS , education, roads

Question 25

direct provision key steps to MF

Answer 25

-Gov decides that a good has significant importance for society
-However if left to free market, if the good has merit good characteristics, D is too low as it will be undervalued by consumers ( so minimal profit incentive)
-There would be under consumption
-so gov uses funds from tax revenue to provide service directly.
-All consumers can use the good/service for free or at lowered price.
-Consumption of goods with positive externalities and/or extra private benefits is increased.
-Quantity now increased closer to QSO than if free market provision.
-Gov allocates more scarce resources to this good/service, so reduces misallocation as more FOP now used for this higher quantity of the good and increased AE
-MF reduced

Question 26

What is government failure

Answer 26

A misallocation of resources arising from government intervention that causes a further divergence between MSB and MSC