Chapter 20

Question 1

What is the effect of government intervention?

Answer 1

Total welfare + if the cost caused by intervention is less than the benefits caused by the intervention.

Question 2

How is a tax used to reduce negative externalities?

Answer 2

Tax on production brings makes MPC = MSC

Question 3

What are the problems of using taxes to solve market failure?

Answer 3

Difficult to target.
Taxes are unpopular

Question 4

How are subsidies used to reduce positive externalities?

Answer 4

Subsidy aiding the public owner makes MSB = MPB

Question 5

What are the drawbacks of using subsidies?

Answer 5

Difficult to target
May conflict with government policies
Hard to remove them after they have been implemented

Question 6

What are maximum pricing and its effect?

Answer 6

Putting a price cap on items—> demand + supply - so excess demand which means that some people will not access these lower prices.

Question 7

What are minimum pricing and its effect?

Answer 7

Putting a minimum price cap —–> demand - supply + so excess supply

Question 8

How is regulation used to correct market failure?

Answer 8

Closes information gaps and sets limits to things

Question 9

What are the benefits of regulation?

Answer 9

Cheap and easy to enforce

Question 10

What are the drawbacks to regulation?

Answer 10

More efficient methods, may effect firms differently