5 - The Market Mechanism

Question 1

Indirect taxes

Answer 1

Imposed on the purchase of goods/services

2 types:

SPECIFIC

• there’s a fixed amount charged per unit of a particular good, no matter its price

AD VALOREM

• these are charged as a proportion of the price of a good

Question 2

Subsidies

Answer 2

Government pay these to encourage production + consumption of goods/services with positive externalities

Question 3

Advantages of subsidies

Answer 3

• the benefit of goods with positive externalities is internalised

IT CAN CHANGE PREFERENCES

• producers will supply goods with positive externalities and consumers will consume them and receive their benefits
• making a merit good cheaper means more demand

Question 4

Disadvantages of subsidies

Answer 4

• opportunity costs

- difficult to put a monetary value on the ‘benefit’ of the positive externalities