government intervention

Question 1

What does indirect tax do?

Answer 1

a levy on expenditure that will increase cost of production to firms but can be transferred to individuals

Question 2

How can you show indirect tax on a diagram

Answer 2

Indirect tax on negative externality diagram of overproduction/consumption
MSC = MPC + indirect tax

Question 3

Chain of analysis of effect of indirect tax

Answer 3

• increase cop of firms
• internalises the externality consequences to firms
• solves overconsumption and overproduction
• promote A.E and generates government revenue
• hypothecating the tax

Question 4

What phrase means the third party issue becomes the polluters problem

Answer 4

• internalising the externality (when polluters pay)

Question 5

What is hypothecating the tax means

Answer 5

Using revenue generated from the tax to further fund the policies to resolve to issue

Question 6

How can hypothecation be used to reduce the negative externality of demerit goods

Answer 6

• education + advertisement
• funds alternative policies
• fund alternative subsidies
• fund rehabilitations

Question 7

list 5 Ev of indirect tax not being effective

Answer 7

• depends on PED
• assumes gov has perfect knowledge where to set tax (over/under tax)
• lead to rise in informal economy
  -regressive (cause income inequality)
• paternalist issue

Question 8

What elasticity of PED is when indirect tax effective

Answer 8

PED is elastic as change in price would lead to proportionate change in quantity

Question 9

How can you show on a diagram that government do not have perfect information in setting indirect tax

Answer 9

Shift in MPC=tax does not reach MSC

Question 10

what is indirect tax regressive

Answer 10

Tax would take a higher proportion of poorer households disposable income than the rich leading the income inequality

Question 11

What can an overtax in indirect tax lead to?

Answer 11

• rise in informal economy as people may smuggle goods of poorer quality leading to further market failure

Question 12

What does paternalised issue mean

Answer 12

When the government is overexaggerating the cost/market failure of a good leading to opportunity cost and restriction of economic agents freedom

Question 13

why may demerit goods be PED inelastic

Answer 13

• may be addictive like smoking and alcohol

Question 14

What is regulation

Answer 14

Laws enacted by the government that must be followed by economic agents that aim to change their behaviour

Question 15

Examples of regulation on command and control aspects

Answer 15

Command: bans, limits, caps, compulsary, innovative regulation

Control; enforcement, punishment e.g fines, bad publicity

Question 16

3 reasons to why regulation is used?

Answer 16

• incentive to change behaviour to influence more/less consumption/production
• solves issues of free market without using the price mechanism
• make firms A.E leading to welfare gains

Question 17

list 4 cons of regulation

Answer 17

• very costly
• hard to set right regulations (strict or lax)
• rise of black market (unintended consequences)
• Equity; may be unfair to different firms as some may rely on the ban then others

Question 18

What are the two types of indirect taxes?

Answer 18

Ad valorem - % of the value of good
Specific tax - tax per unit

Question 19

What does indirect tax internalise

Answer 19

Internalises the externality to firms

Question 20

Is subsidies a form of government intervention?

Answer 20

Yes

Question 21

What are the cons of subsidies

Answer 21

• firms can become inefficient, zombie firms reliant on subsidies
• government do not have perfect information on how much to support (over/under spend)

Question 22

What is maximum and minimum price

Answer 22

max price - price ceiling below equilibrium that is statutory

min price - price floor above equilibrium also statutory

Question 23

What is trade pollution permits

Answer 23

government set a limit of how much pollution a firm can produce, these permits can be traded and sold

Question 24

What is deregulation

Answer 24

when governments reduce legal barriers to entry, incentivise new firms to enter, leading competition and greater efficiency

Question 25

list theme 1 methods of government intervention

Answer 25

• max price and min price
• indirect taxes
• subsidies
• state provisions of public goods
• provision of information
• trade pollution permits
• regulation

Question 26

list theme 3 government intervention

Answer 26

• control mergers
• price regulation
• profit regulation
• quality regulation/performance target
• privatisation
• nationalisation
• subsidies
• windfall tax
• deregulation
• health and safety of workers (workers right)
• demergers
• competitive tendering
  restrict monopsony power

Question 27

3 pros of deregulation

Answer 27

• increase competition lead to allocative efficiency, leading to increase consumer surplus and choice
• increase in productive and X efficiency to stay ahead of competitors
• rise in D.E due to SNP to remain competitive

Question 28

2 cons of deregulation

Answer 28

• If there was a natural monopoly, there is a loss of natural monopoly as increase in AC as EOS is lost, fall in P.E leading to wasted duplicated resources = allocative inefficiency
• lead to formation of oligopolies and local monopolies, there will be no guarantee on what would occur