3. GOVERNMENT MICROECONOMIC INTERVENTION

Question 1

Market failure

Answer 1

When free market does not make the best use of scarce resources

Question 2

Situations where market failure occurs

Answer 2

Lack of public goods
Overconsumption of demerit gods
Underprovision of merit goods

Question 3

Reasons for lack of public goods

Answer 3

In free market = private firms = aim is profit maximisation

Public goods- free rider problem, non excludable non rivalrous, no payment

No profit motives to supply public goods

Question 4

Gov intervention on public goods

Answer 4

Direct provision

Question 5

Gov intervention on demerit goods

Answer 5

Taxes, indirect tax to increase price and discourage consumption

Regulations like age restrictions, fines, healthwarnings

Question 6

Gov intervention on merit goods

Answer 6

Subsidies
Financial support to encourage production
Reduces price for consumers

Direct provision
Information provision

Question 7

Reasons for price control

Answer 7

Stabilise prices
Ensure affordability
Prevent excessive pricing

Question 8

Maximum price (price ceiling)

Answer 8

Legal price that is below equilibrium price meaning producers cannot charge higher than certain price

Question 9

Advantages of maximum price

Answer 9

Increased affordability
Consumer welfare
- protects consumers from excessive pricings
Encourage consumption, may lead to economic growth

Question 9

Disadvantage of maximum price

Answer 9

Shortages as prices are low, demand > supply

Creation of black markets as shortages occur

Long waiting list, consumer dissatisfaction

Question 10

Minimum price (price floors)

Answer 10

Legal price set above the equilibirum price to protect producers

Question 11

Advantages of minimum price

Answer 11

Fair income for producers esp in industries where it is unpredictable/ volatile eg farmers

Prevents exploitation of labour (minimum wage)

discourage demerit good consumption

Question 12

Disadvantages of minimum price

Answer 12

Surplus -> waste, increase price, producers will supply more but consumers less willing to buy

Reduce efficiency

• artificially maintaining high price reduce incentives for producers

Question 13

Indirect tax

Answer 13

Tax imposed on goods & services rather than income

Question 14

Impact of indirect tax on price & quantity

Answer 14

Increases price

• taxes increase cost of production, higher price for consumers
• used to reduce demerit good consumption

Question 15

Impact of indirect tax on market effects & revenue

Answer 15

Indirect tax generates gov revenue
- can use for funding of public goods

helps correct negative externalities
- reduce consumption of demerit goods

Question 16

Impact of subsidies on price & quantity

Answer 16

Lowers price for consumers

Encourage consumption for merit goods

Supports producers

Question 17

Buffer stock schemes

Answer 17

Gov intervention to stabilise prices of commodities during periods of surplus and release stock during shortages

Question 18

Objectives of buffer stock

Answer 18

Price stability

Income support for producers

Maintain supply reserve during periods of low supply

Question 19

Disadvantages of buffer stock

Answer 19

Risk of excess supply - waste

High cost to purchase, store and maintain stock before having to release

Question 20

Gini coefficient

Answer 20

Measure of income/ wealth inequality, ranging from 0 to 1

Question 21

Gini = 1

Answer 21

Perfect inequality

Question 22

Gini = 0

Answer 22

Perfect equality

Question 23

Policies to redistribute income/ wealth

Answer 23

Minimum wage

Transfer payments

Progressive tax

Question 24

Minimum wage

Answer 24

Legal minimum hourly wage set to ensure fair income

helps reduce poverty

helps improve equality

Question 25

Transfer payments

Answer 25

Direct payments given from gov to indivudals

Such as

Welfare benefits

Unemployment benefits

Pensions