3.1 & 3.2 Reason And Methods For Government Intervention

Question 1

Reason for government intervention

Answer 1

1. Market failure
   - it occurs when the price mechanism fails to take into account all of the cost and benefits that are necessary to produce or consume a product

Question 2

How government intervene the market

Answer 2

1. Public goods
2. Merit and demerit goods
3. Controlling prices
4. Taxes
5. Subsidy

Question 3

Types of indirect taxes

Answer 3

1. Specific or unit tax
   - impose a specific amount of tax

2.Ad valorem taxes
- impose by percentage of the price

3. Excise tax
   - imposed on particular goods and services such as petroleum, cigarettes and alcohol.

Question 4

Reasons for indirect tax

Answer 4

1. Revenue
2. Decrease consumption
3. Switch expenditures away from imports towards domestically produced goods
4. Exise taxes can redistribute income

Question 5

Indirect tax on different elasticity of supply and demand

Answer 5

1. Inelastic supply
   - Consumer pays a smaller proportion of tax compared to producers
   - Producer pays a greater proportion of tax
2. Elastic Supply
   - Consumer pays a larger proportion of tax
   - Producer pays a smaller proportion of tax
3. Inelastic demand
   - Consumer pays a larger proportion of tax
   - Producer pays a smaller proportion of tax
4. Elastic demand
   - Consumer pays a smaller proportion of tax
   - Producer pays a larger proportion of tax

Question 6

Essay (direct tax)

Answer 6

1. Progressive tax
   -Tax equality
   - who needs to pay more can be easily determined
   -control inflation and unlikely to worsen cost push inflation

Limitation
- tax evasion
Informal market is hard to be tax

Question 7

Essay Indirect tax

Answer 7

1. Do not disincentice effect and can Rasse revenue on inelastic goods
2. Can capture revenue in the informal sector where many workers do not pay income tax but still consumed taxed goods

Disadvantages
- cost push inflation and more unequal distribution of income bcz it’s a regressive tax, contribute to poverty and lower tax revenue in the long run

Effectiveness
- effective on price inelastic goods

Limitations
- consumers turn to informal market when price inelastic goods rise.