government intervention

Question 1

what is an indirect tax for go intervention

Answer 1

tax that increases firms costs of production but can be transferred to consumers via higher prices
- used to solve any market failures where there is an overconsumption and/or overproduction taking place

Question 2

benefits of indirect tax in solving market failure of neg externality

Answer 2

internalises the externality
increases firm’s cost of production, increasing the MPC towards MSC = new equilibrium in the market = SO is reached

Question 3

negatives of using indirect tax to solve market failure for neg externalities

Answer 3

assumption of firms having perfect information is wrong:
- overtax = guaranteed black markets form = unemployment and regressive effects (taking a larger proportion of the poor than the rich)
- undertax = not fully internalising the externality and not solving market failure

demand is price inelastic (needs to be elastic in order for demand to be responsive to increase MPC and reach SO)

Question 4

what is regulation

Answer 4

rule of law enacted by the gov that must be followed by economic agents to encourage a change in behaviour
non-market based approach

Question 5

how regulation is done to solve a market failure and its benefits

Answer 5

through command + control
command - must be strong
- bans
- limits (time, age)
- caps
- compulsory regs
- innovative regs
control - must be strong so people have incentive to follow
- enforcement (regs are checked)
- punishment (fines)

incentive to change behaviour
move Q to more SO level = AE and welfare gain

Question 6

negatives of regulation used for solving market failures

Answer 6

costly - administrative and enforcement costs (policing) in order to incentivise people to follow regulations + change behaviour effectively
the setting of command/ regulation
- too lax = not fully internalising the externality meaning SO level isn’t met
- too strict = unintended consequences such as black markets or firms could shut down (increases costs of firms)

Question 7

benefits of using min pricing as a form of solving market failure

Answer 7

contraction in demand = consumption discouraged = Q decreases to SO optimal level of Qstar
internalises externality = AE and welfare gain

Question 8

negatives of using min pricing to solve market failure

Answer 8

price inelastic demand
- decreased quantity demanded will be proportionately be less than the increase in price) = not enough to fully internalise the ext

regressive = burdens poor, greater proportion of income is taken than the rich - alternatives supplies such as black markets may arise

Question 9

what is max price and its benefits of being used to resolve market failure

Answer 9

used when prices are deemed to high for govs - price ceiling imposed below Qequilibrium
= encourages more consumption of essential goods/ services = more equity

Question 10

negative of using max pricing to solve market failure

Answer 10

shortage (Contraction supply) Qs to Qd are people willing to buy good/service but unable to get supply - indvs go to formed black markets instead where they can be exploited through poor quality and high prices = pure gov failure

setting price at right level
- too low = massive excess in demand
- too high = not the amount of equity desired