2.11 Government Intervention

Question 1

What is an indirect tax

Answer 1

An indirect tax is a charge paid to government based on the spending on a good or service

Question 2

What is the intended purpose of an indirect tax?

Answer 2

The usual intended purpose of an indirect tax is to reduce production and consumption of a product that is over produced and over consumed. An indirect tax is a market based intervention commonly used to correct market failure associated with de-merit goods and products which create negative externalities, in response to resources being over allocated by markets.

Question 3

What is a specific tax

Answer 3

Is a certain fixed sum charged per unit of the good or service

Question 4

What is an ‘ad valorem’ tax?

Answer 4

Is applied ‘according to value’, such as a percentage of the selling price of the good or service

Question 5

What are the advantages of using an indirect tax to correct market failure?

Answer 5

An indirect tax can be used to reduce production and consumption of demerit goods, and production and consumption of products that result in negative externalities; use of a tax may lead to a more efficient allocation of resources, increasing social welfare

Question 6

What are the disadvantages of tax?

Answer 6

Indirect tax is regressive in nature
It is very difficult to determine the correct level of tax

Question 7

Posssible forms of government intervention

Answer 7

-Tax
-Subsidy
-regulation
-price control
-state provision
-buffer stock schemes