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