Chapter 3: Government Micro Intervention

Question 1

characteristics of private goods (3)

Answer 1

1. rivalry (consumption reduces amount available)
2. excludable (those not willing to pay cannot use the good)
3. rejectable

Question 2

problems of maximum price (2)

Answer 2

1. shortage
2. black market

Question 3

3 ways government can solve shortage

Answer 3

1. give subsidy
2. directly producing the good
3. rationing the good

Question 4

2 ways government can solve surplus

Answer 4

1. buy the excess supply
2. restrict production of the good

Question 5

average tax rate formula

Answer 5

Question 6

marginal tax rate formula

Answer 6

Question 7

canons of taxation (4)

Answer 7

1. people with same income should pay same tax
2. rich should be taxed more than the poor
3. difficult to evade
4. convenient for the government
5. low cost of collection
6. easy to pay
7. limited disincentive effects

Question 8

reasons for nationalisation (3)

Answer 8

1. increase welfare
2. control monopolies (prevent them from raising prices)
3. more investment
4. more likely to provide loss making services
5. keep control of important industries

Question 9

reasons against nationalisation (3)

Answer 9

1. firms become inefficient because there is less competition
2. less innovation
3. decisions may be made for political reasons

Question 10

reasons for privatisation (4)

Answer 10

1. lower costs
2. more choices
3. more innovation
4. more government revenue
5. reduction in government spending
6. wider share ownership

Question 11

reasons against privatisation (3)

Answer 11

1. private firms would provide less public goods
2. firms will lay off workers to reduce costs
3. private firms have less consideration of negative externalities

Question 12

why government intervention does not always improve the market (3)

Answer 12

1. government does not have complete information. information collected may be inaccurate
2. they may not know the full effect of the policy
3. policies will cause market disequilibrium