Government Intervention

Question 1

minimum price

Answer 1

a price floor for a market, that the suppliers cannot sell the product legally at a lower price (above equilibrium price to be effective) eg. alcohol, cigarettes, labour market NMW

Question 2

maximum price

Answer 2

a price ceiling where the government sets a legal limit on the price of a good or service- with the aim of reducing prices below the equilibrium price (below equilibrium price to be effective) eg. energy bills, rent controls, cap on mobile roaming charges

Question 3

reasons for tax

Answer 3

-source of government finance
-resolve market failures
-more equal dist of wealth and income
-control economy

Question 4

cannons of tax

Answer 4

equity, certainty, economical, convenience

Question 5

indirect tax

Answer 5

an amount levied on a good or service by the government that increases the supply costs faced by producers, and can be passed on to consumers in the form of higher prices

Question 6

direct tax

Answer 6

levied on income, wealth and profit

Question 7

how is tax per unit shown on a diagram

Answer 7

vertical distance between the two supply curves

Question 8

2 types of indirect tax

Answer 8

specific tax, ad valorem tax

Question 9

specific tax

Answer 9

a set tax per unit eg. £5 per unit sold
parallel shift in of supply curve

Question 10

ad valorem tax

Answer 10

a percentage tax eg. 20% on the unit price (supply curve pivots)

Question 11

examples of indirect taxes

Answer 11

-VAT
-landfill tax
-fuel duties
-alcohol duties
-tobacco duties
-air passenger duty

Question 12

incidence of tax

Answer 12

refers to how much of the total tax burden is payed for by the consumer or producer

Question 13

is the tax burden on the consumer of producer in an elastic demand

Answer 13

burden on producer

Question 14

is the tax burden on the producer or consumer for an inelastic demand

Answer 14

burden on consumer

Question 15

hypothecation of a tax

Answer 15

the dedication of the revenue from a specific tax for a particular expenditure purpose (aka. ring-fencing or earmarking of a tax)

Question 16

pigovian tax

Answer 16

a tax placed on any good with negative externalities

Question 17

aim of a pigovian tax

Answer 17

internalise the externality by creating a socially optimum allocation of resources by making the price of the good equal to the MSC, and making the polluter pay (increases cost of production)

Question 18

subsidy

Answer 18

a financial package provided to firms from the government in order to incentivise more production and reduce the market price

Question 19

incidence of a subsidy

Answer 19

identifies who benefits more from the provision of a subsidy

Question 20

who benefits more from a subsidy on a product with elastic demand

Answer 20

producer benefits more

Question 21

who benefits more from a subsidy on a product with inelastic demand

Answer 21

consumer benefits more

Question 22

nationalisation

Answer 22

when the government buys an industry from the private sector

Question 23

privatisation

Answer 23

when a government sells a publicly owned business to the private sector

Question 24

regulation

Answer 24

the control of the market through rules and laws eg. smoking bans, minimum age laws, speed limits, fishing quotas

Question 25

deregulation

Answer 25

occurs when the government removes or reduces the restrictions in a particular industry to improve business operations and increase competition

Question 26

government failure

Answer 26

when the government intervene to correct a market failure but instead exacerbates the existing market failure or creates a new one

Question 27

reasons for government failure (acronym & stands for)

Answer 27

CRIPPL
Costs outweigh benefits
Regulatory capture
Information failure
Political self interest
Policy myopia
Law of unintended consequences