2.7 Government Intervention

Question 1

Reasons for government interference in markets

Answer 1

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Firms (support)
Equity (promote)
Tax revenues 
Consumption (influence)
Households (support)
Production (influence) 
Market failure (correct)

Question 2

Tax concessions

Answer 2

Allowances to new firms or small businesses

Question 3

Negative externalities

Answer 3

External cost imposed on stakeholders not involved in economic transaction

Question 4

Indirect tax

Answer 4

Tax levied on producers of goods, that are often passed on to the consumer

Question 5

Price controls

Answer 5

Government regulations establishing a maximum or minimum price to be charged for certain goods.

Question 6

Price ceilings

Answer 6

Prices below the market equilibrium price that governments impose on goods to ensure their availability across income levels, protecting consumers forum soaring prices, encourages consumption and ensures access to as many consumers as possible

Question 7

Price ceiling surplus

Answer 7

Consumer surplus is increased, producer surplus is decreased

Question 8

Deadweight loss

Answer 8

Cost to society as a result of allocative inefficiency in the market, deadweight loss is eliminated in market equilibrium

Question 9

Price floors

Answer 9

Government regulations that set binding minimum prices to encourage production. These prices are above the equilibrium price.

Question 10

Earning government revenue as a reason for govt intervention

Answer 10

• govt revenue fiances intervention that betters society

Question 11

Supporting firms as a reason for govt int

Answer 11

• subsidizing firms
• tax concessions
• R&D funding
• financial bailouts
• protecting domestic industries
• supporting new small firms

Question 12

Supporting low income household

Answer 12

• concern for inequality and income distribution
• improve living standards
• progressive taxes ( tax is calculated relative to income)

Question 13

Influence levels of production

Answer 13

• subsidies and indirect taxes
• limit production of demerit goods
• encourage consumption of merit goods

Question 14

Promoting equity

Answer 14

• normative concept concerned with justice and fairness

- relates to how fairly income is distributed across society

Question 15

Catergories of indirect taxes

Answer 15

• specific

- ad volerum

Question 16

Specific tax

Answer 16

• taxes charge a fixed amount of tax per unit sold
• indiscriminate as tax per unit is fixed
• e.g on cigarettes or toll

Question 17

Ad volerum tax

Answer 17

• percentage tax on the value of a good or service
• tariffs, sales tax and VAT
• charge a larger amount of tax based on value of purchase, e.g higher property values = greater tax

Question 18

Disadvantage of subsidies

Answer 18

• consumers benefit form lower costs, producers benefit from more profit
• expensive for govt.
• reduces incentive for firms to be competitive and cut costs for efficiently
• opportunity cost for use of govt funds