chp 15

Question 1

Mixed economic system

Answer 1

An economy in which both the private and public sectors play an important role

Question 2

Give two advantages and two disadvantages of a mixed economy

Answer 2

Two advantages of a mixed economy are that public goods and merit goods are provided by the government and the government can seek to achieve a more even distribution of income through the use of taxation and subsidies.

Two disadvantages are that there many examples of market failure and if there is too much government intervention private firms may be discouraged from expanding because of too many regulations and red tape

Question 3

Maximum price
Above or below equilibrium price:
Effect on market :
Where used :

Answer 3

Below
Shortage, rationing
Wheat , cooking oil , flour , sugar , fuel

Question 4

Minimum price

Above or below equilibrium price:
Effect on market :
Where used

Answer 4

Above
Excess supply
Agricultural products, demerit goods , wages of unskilled labour

Question 5

Subsidy

Answer 5

A payment by a government to encourage the production or consumption of a product

Question 6

Indirect taxes

Answer 6

Taxes on goods and services

Question 7

Subsidy eg poor farmers in India revive a subsidy from the government to help pay their fuel costs

Answer 7

Paid to farmers, and to manufacturing and service sector businesses, in order to keep their costs, and hence prices, down. If effective, subsidies can contribute to improving the distribution of income, and aid increased exports and the bigger consumption of merit goods.

Question 8

Indirect tax eg A goods and service tax was intro in India in 2017

Answer 8

Applied on all goods and services, although there are exemptions. As a single tax, an indirect tax is transparent and is applied throughout the whole economy.

Question 9

The impact of a subsidy or indirect tax depends on

Answer 9

The size of the subsidy or indirect tax and the price elasticity of demand

Question 10

Regulation

Answer 10

Various means by which governments seek to control production and consumption

Question 11

Privatization

Answer 11

The sale of public sector assets to the private sector

Question 12

Nationalization

Answer 12

Moving the ownership and control of an industry from the private sector to the government

Question 13

Direct provision

Answer 13

Where a government provides essential goods and services

Question 14

Explain whether it is better to impose an indirect tax on a product that has an elastic demand or on one with an inelastic demand.

Answer 14

It is best to impose an indirect tax on a product that has an inelastic demand curve. The change in quantity demanded will be relatively less than the increase in price and there will be an increase in tax revenue. With an elastic demand, there Will be a greater decrease in demand compared to the increase in price and a decrease in tax revenue.

Question 15

The government of a mixed developing economy wants to increase the quantity and quality of health provision. Explain the ways in which this might be done and discuss how effective each way might be.

Answer 15

This could be achieved through an increase in taxation to fund an expansion of health provision. It is best funded through increased income taxes on higher-income earners. No charge at the point of use is likely to be the most effective way.
• As above for taxation but with a small charge to be made at the point of use for some treatments. This is also effective and provides a way of charging for those who can afford to pay for health provision.
• Additional tax revenue could be generated by increasing indirect taxes on some demerit goods.
This has some value since those who consume demerit goods such as tobacco and alcohol are most likely to require health provision at some stage of their lives.

Question 16

The government of Venezuela imposes maximum prices on a wide range of
staple goods and consumer products.
i Explain how maximum price control is likely to generate a shortage in a
competitive market.
i Explain any circumstances when a shortage may not develop.

Answer 16

The maximum price P, to be effective, has to be below the market equilibrium price. As the diagram shows, at this price, the quantity demanded exceeds that which suppliers are willing to provide.
i • A shortage may not develop if some form of rationing is used, for example food coupons.
• The risk is that supplies could be sold on the illegal market, bypassing the official market.

Question 17

Some governments have fixed minimum prices paid to farmers for agricultural crops.
Explain how minimum price control is likely to generate surpluses in a
competitive market.
ii Explain how a government might avoid such a situation.

Answer 17

• The minimum price has to be above the market equilibrium price to be effective. A surplus results, since suppliers are willing to supply more than is demanded by consumers.

The give is forced into buying surplus stocks in order to avoid a fall in the price