2.3 Government Intervention

Question 1

Types of Government Intervention in Microeconomics

Answer 1

Taxes
Subsidies
Price Controls (Maximum and Minimum Price)

Question 2

Direct Tax

Answer 2

A tax on income

Question 3

Indirect Tax

Answer 3

A tax on goods and services

Question 4

Specific Tax / unit tax

Answer 4

a fixed amount of tax imposed on a product
It shifts the supply curve parallel upwards by amount of tax

Question 5

Percentage tax / ad valorem tax

Answer 5

Tax is a percentage of the selling price.
Its shift of the supply curve is not parallel.
The gap will get bigger as the price of the product rises.

Question 6

Why do government impose/reduce taxes?

Answer 6

Generate Tax revenue for the government
Discourage consumption of a ‘harmful’ product
Encourage consumption of a ‘good’ product

Question 7

Tax incidence

Answer 7

The impact/burden of a tax OR the amount which someone is made worse off by the tax.
Price inelastic good - the burden is on the consumer
Price elastic good - the burden is on the producer

Question 8

Subsidy

Answer 8

a payment per unit of output from the government to a producer in order to lower costs or increase ouput. More will be supplied at every price

Question 9

Specific subsidy

Answer 9

Also know as a ‘per-unit-subsidy’; a specific amount is given for each unit of the product

Question 10

Percentage subsidy

Answer 10

a non parallel shift of the supply curve

Question 11

Why do governments give subsidies?

Answer 11

• Lower the price of essential goods for consumers - increasing consumption
• Guarantee supply of product that government sees as necessary because it is a basic food supply for consumers or an important industry for employment
• Enable producers to compete with overseas trade
• encourage consumption of goods the government sees as positive for society

Question 12

Evaluating a subsidy

Answer 12

• Opportunity cost - government is not spending on other things
• inefficiency of producers - helping them to compete against foreign producers means it is no longer a ‘free market’
• even if consumers benefit from lower prices, they are paying for it in taxes (taxpayers fund subsidies)
• damage to sales of foreign producer

Question 13

Price controls

Answer 13

When the governemnt intervenes in a market and sets the price above or below the equilibrium price

Question 14

Productive/technical efficiency

Answer 14

where each firm pursues the least cost method of production

Question 15

Allocative efficiency

Answer 15

where firms produce goods that directly satisfy wants (price = marginal cost) and where resources are allocated into their best possible use

Question 16

Maximum Price

Answer 16

the government intervenes in the market and sets price below the equilibrium leading toa shortage or excess demand

Question 17

Maximum Price Consequences

Answer 17

• shortage
• black market/ underground market
• queues and unfair systems
• producers may start to decide who is allowed to buy
• non price rationing (waiting in line/first come first served, coupon distribution, sell to preferred customers)
  allocative inefficiency
  welfare loss