2.7 ROLE OF GOVERNMENT IN MICROECONOMICS

Question 1

PRICE CEILINGS

Answer 1

When the government sets a maximum price for a good or service.

Question 1

POSSIBLE REASONS FOR INTERVENTION

Answer 1

1. To earn government revenue
2. To support firms
3. To support households on low incomes
4. To influence the level of production
5. To influence the level of consumption
6. To correct market failure
7. To promote equity

Question 2

CONSEQUENCES OF PRICE CEILING

Answer 2

1. Shortages
2. It generates a rationing problem
3. It promotes the creation of parallel (illegal black) markets
4. It eliminates allocative efficiency and generates a welfare loss

Question 3

SOLUTIONS TO PRICE CEILING PROBLEMS

Answer 3

Increase supply through intervention.

Question 4

PRICE FLOORS

Answer 4

When the government sets a minimum price for a good or service.

Question 5

PRICE FLOOR TYPICALLY USED FOR?

Answer 5

1. Protect producers that could be in danger (farmers)
2. Protect workers (minimum wage)

Question 6

CONSEQUENCES OF PRICE FLOOR

Answer 6

1. Surpluses
2. Promotion of parallel black markets
3. The government needs to dispose of surplus
4. Allocative inefficient and generates welfare loss

Question 7

SOLUTIONS TO PRICE FLOOR PROBLEMS

Answer 7

Government purchase of surplus (to store, sell, donate, etc.)

Question 8

INDIRECT TAXES AIMS

Answer 8

1. Collect Revenue
2. Discourage consumption of certain goods
3. Redistribute Wealth
4. Correct Allocative Inefficiencies

Question 9

SPECIFIC TAX

Answer 9

A FIXED AMOUNT OF TAX PER UNIT SOLD.

Question 10

PERCENTAGE TAX

Answer 10

A FIXED PERCENTAGE CHARGED ON THE SELLING OF THE GOOD.

Question 11

MERIT GOODS

Answer 11

Goods that are beneficial to the individual and society as a whole and are usually, under-provided.

Question 12

DEMERIT GOODS

Answer 12

Goods that are harmful to the individual and society as a whole and are usually, over-provided.

Question 13

ROLES OF SUBSIDIES

Answer 13

1. Increase producer revenues
2. Make basic necessities more affordable
3. To support the growth of a particular industry
4. Encourage the consumption of a particular good or service.

Question 14

Services Provided Directly By The Government

Answer 14

1. Healthcare
2. Public Transport
3. Education
4. Rail/Airline Services
5. Energy

Question 15

LEGISLATION

Answer 15

LAWS SET BY THE LEGISLATIVE BODIES OF A GOVERNMENT.

Question 16

REGULATION

Answer 16

TO MONITOR OR REGULATE AN INDUSTRY.

Question 17

CONSUMER NUDGES

Answer 17

Governments may use consumer nudges to correct issues or problems in the market. These nudges tend to be rather inexpensive and impactful.