Government Intervention

Question 1

Indirect tax

Answer 1

Tax imposed on expenditure, paid of your behalf by the producer

Question 2

Specific tax

Answer 2

A fixed amount imposed on a product

Question 3

Percentage (ad valorem) tax

Answer 3

Tax that is a percentage of the selling price of the good

Question 4

Deadweight loss

Answer 4

The loss of consumer and prodcuer surplus that arises in the market due to government intervention causing supply and demand to no longer by in equilibrium

Question 5

Tax burden elasticity

Answer 5

Depending on the relative elasticity of demand/supply, the burden of an indirect tax on consumers and producers will be different.

Question 6

Subsidies

Answer 6

An amount of money paid by the government to a producer per unit of output

Question 7

Why would a government pay a subsidy?

Answer 7

• To lower the price of essential goods to encourage an increase in consumption
• To guarantee the supply of necessary products
• To enable domestic producers to compete with foreign producer and protect employment

Question 8

What does a subsidy do to the supply?

Answer 8

Decreases COP so increases supply (to the right)

Question 9

What three things does the government need to consider when imposing a subsidy?

Answer 9

Opportunity cost, complacency (lazy firms), impact on foreign producers (especially developing countries)

Question 10

What are maximum and minimum prices aimed at helping?

Answer 10

Maximum price - helping consumer
Minimum price - helping producer

Question 11

Maximum price causes what?

Answer 11

A shortage of goods

Question 12

How may a shortage be eliminated?

Answer 12

Subsidizing firms, producing goods directly or releasing stock of goods

Question 13

What do all of the methods of eliminating shortages have in common?

Answer 13

All produce more supply

Question 14

Minimum prices are imposed for what two reasons?

Answer 14

To raise the incomes of producers and to protect workers by setting a minimum wage

Question 15

Minimum price causes what?

Answer 15

A surplus of goods

Question 16

Surplus can be eliminated by what two methods?

Answer 16

Purchasing surplus of goods (expensive) or encouraging an increase in demand (eg advertising)

Question 17

What are the three reasons that government would intervene in the market?

Answer 17

To nudge consumers to make better choices, to promote sustainability and to promote equity and economic wellbeing.

Question 18

What are the three ways that governments can nudge consumers to make better choices?

Answer 18

Indirect taxes (raises prices to decreases demand), minimum prices (raises prices to decrease demand), subsidies (decreases price and increases demand)

Question 19

How do governments promote sustainability?

Answer 19

Indirect taxes on unsustainable production methods and subsidies for clean production methods

Question 20

How to governments promote equity and economic wellbeing?

Answer 20

Minimum wages ensure fair wages, minimum prices ensure producers earn a fair return, maximum prices on necessity keep them affordable,