Gov intervention (market failure)

Question 1

indirect tax advantages

Answer 1

• inelastic demand can gain higher tax revenue
• internalises the negative externality for a firm
• due to price mechanism, a tax imposed will force consumers & producers to adjust behaviour

Question 2

indirect tax disadvantages

Answer 2

• hard to place monetary value on external costs
• can reduce international appeal as costs increase compared to competitors
• with inelastic demand, Qd doesn’t fall much (addictive)
• usually regressive

Question 3

subsidy advantages

Answer 3

• increase consumption of merit goods
• reduces prices of beneficial goods making them more affordable (reduces effect of relative poverty)

Question 4

subsidy disadvantages

Answer 4

• hard to place value
• opportunity costs as money could be used elsewhere
• inelastic goods may reduce in price but not significantly increase in demand

Question 5

min prices advantages

Answer 5

• helps producers when a market is flooded
• discourages production of demerit goods

Question 6

min prices disadvantages

Answer 6

• fall in Qd may not be enough if inelastic
• regressive
• causes black markets
• difficult to set at right prices
• if min price too high, firms may suffer

Question 7

max prices advantages

Answer 7

• encouraging consumption of merit goods
• improves equity

Question 8

max prices disadvantages

Answer 8

• shortages due to contraction of supply
• black markets
• difficult to set at right level