Goverment Intervention

Question 1

Definition price ceiling

Answer 1

A price above which it is illegal to trade. Maximum price a good or service

Question 2

Definition of price floor

Answer 2

A price below which it is illegal to trade. The minimum price a good or service

Question 3

Definition of subsidy

Answer 3

Payment made by the government or another authority usually to producers for each unit of the subsidised good they produce

Question 4

Definition of tax

Answer 4

A compulsory levy imposed by the government to pay for its activities

Question 5

Disadvantages of regulation

Answer 5

• those setting the regulations are not totally neutral and may be influenced by the industry
• takes along time for regulation to go through
• must be enforced = hard to make sure there is enough labour to do this

Question 6

Positives of regulation

Answer 6

• hypothecating = using fine money to fund other policy’s

- most people are law abiding

Question 7

Conditions for tax

Answer 7

• size of tax in relation to free market price affects affectiveness
• if the products demand is elastic/inelastic

Question 8

Conditions for information provision

Answer 8

• how widespread the information is
• has to be shocking or powerful advertising
• funding

Question 9

What’s good and bad about information provision

Answer 9

• no compulsion = no effect if you don’t take the advice
• can change long-term attitudes
• long lasting
• along time to work

Question 10

Criteria of policies

Answer 10

• cost
• long lasting
• fast acting
• flexibility
• certainty of impact

Question 11

Positives of indirect tax

Answer 11

• if it is a inelastic demand the tax revenues are strong which can be spend elsewhere - hypothecating
• use of price mechanisms leaves it up to the consumer to adjust there behaviour - incentive function

Question 12

Negatives of indirect tax

Answer 12

• inelastic good, demand might not fall
• hard to put a value on external costs
• regressive in nature, a larger percentage of poorer persons income
• increase production cost in relation to foreign competitors

Question 13

Advantages of subsidies

Answer 13

• subsidies on merit good increase consumption = near social optimum
• more affordable for those on lower incomes, reducing relative poverty

Question 14

Negatives of subsidies

Answer 14

• carries an opportunity cost - gov could spend the money elsewhere
• firms receiving subsidies may become reliant on them = inefficiency
• could be seen as creating a trade protection = other countries doing the same
• if the alternative good has inelastic demand, no significant increase in consumption

Question 15

Positives of minimum price

Answer 15

• creates a good standard of living
• encourage production of essential products eg. Farming
• excess supply can be stored and released in times of shortages

Question 16

Negatives of minimum price

Answer 16

• consumers pay higher prices = less disposable income
• reduce international competitiveness
• interventions to reduce demerit goods can lead to potentially more harmful alternatives eg black market

Question 17

Positives of maximum price

Answer 17

• promote equality and fairness for hardest hit consumers

- prevents monopolies exploiting consumers

Question 18

Negatives of maximum prices

Answer 18

• some people who want be good/service can’t get it as there is too much demand
• too much demand = queues and shortages
• may lead to establishment of black markets due to short supply