Government intervention

Question 1

What are indirect taxes?

Answer 1

They are taxes on expenditure.

Question 2

Examples of indirect taxes?

Answer 2

VAT, excise taxes, taxes on gambling.

Question 3

What do they cause?

Answer 3

The supply curve to shift to the left.

Question 4

How can indirect taxes be used?

Answer 4

They can be used to deal with external costs. Their aim is to internalise the externality so that output and consumption are at the level at which SMB equals to SMC.

Question 5

What are the advantages of indirect taxes?

Answer 5

Incentive to reduce pollution

Source of revenue for the government

Few administrative costs

Question 6

What are the disadvantages of indirect taxes?

Answer 6

Ineffective in reducing pollution if demand is price inelastic

Difficulty of setting an appropriate tax

Increased business costs

Question 7

What is a subsidy?

Answer 7

It is a grant to business that reduces their production costs.

Question 8

How can subsidies be used?

Answer 8

They could be used in the case of external benefits of production. Subsidies can encourage production so that the social optimal level is reached.

Question 9

What does a subsidy cause?

Answer 9

A rightward shift in supply. A subsidy will cause consumption and output to rise to the socially optimum level.

Question 10

What are the advantages of subsidies?

Answer 10

Reduction in cost of production

Incentive for people to increase consumption

Might help to reduce inequality

Question 11

What are the disadvantages of subsidies?

Answer 11

Cost to the taxpayer

Ineffective in increasing consumption if demand is inelastic

Diffuculty of setting an appropriate subsidy

Question 12

What is a maximum price?

Answer 12

A maximum price is a price which is usually set by the government which makes it illegal for firms to charge more than a certain price for a given quantity of a product.

Question 13

What are maximum prices used for?

Answer 13

Governments have used maximum price controls or price ceilings in a variety of contexts eg rented accomodation

Question 14

What does a shortage cause on the maximum price curve cause?

Answer 14

Could result in a black market in which those with the supplies of the product can sell it illegally at a price significantly higher than the maximum price.

Question 15

What are the advantages of maximum prices?

Answer 15

They enable consumers on low incomes to be able to afford a product

They help to prevent an increase in the countrys rate of inflation

They can prevent the exploitation of consumers by monopolies

Question 16

What are the disadvantages of maximum prices?

Answer 16

There is a danger that shortages mean some consumers are unable to find supplies of the product

Producers may exit the market in order to use their resources to produce goods that are more profitable

If the government subsidises producers to encourage them to maintain output there will be a significant cost to the taxpayer

Question 17

What is minimum prices?

Answer 17

It is a price usually set by the government which is guaranteed to producers.

Question 18

In what ways can minimum prices be used?

Answer 18

Commodities

Consumer goods

Labour market

Question 19

What does the surplus on the minimum price curve show?

Answer 19

It shows that there will be a surplus and the government buys this surplus and stores it for years in which there is a shortage.

Question 20

What are the advantages minimum price?

Answer 20

Producers know in advance the price they will receive for their product.

The greater certainty enables producers to plan investment and output.

They can prevent exploitation of producers by wholesalers and retailers who have significant buying power.

Question 21

What are the disadvantages minimum price?

Answer 21

If the minimum guaranteed price is set too high there will be surpluses each year.

These schemes involve costs of shortage which must be borne by the taxpayers

These schemes encourage over production and may result in inefficient allocation of resources.

Question 22

What are tradable pollution permits?

Answer 22

They are rights to sell and buy actual or potential pollution in artificially created markets.

The permits may be traded between firms so that clean firms can sell their surplus permits to firms that are more polluting.

Question 23

What are the advantages of tradable pollution permits?

Answer 23

These schemes work through the market mechanism

They are an incentive for firms to reduce pollution

The cost of administering these schemes are low relative to those associated with systems of regulation

There can be planned reduction in polution over time

Question 24

What are the disadvantages of tradable pollution permits?

Answer 24

Pollution will continue, at a lower level than previously

Large efficient firms will buy up the permits and continue to pollute

They need to be internationally enforced to be effective

They might make the countrys goods less internationally comptetitive

Question 25

What is the state provision of public goods?

Answer 25

When the government provides public goods financed through taxation.

Question 26

What is the disadvantage of the provision of public goods?

Answer 26

That politicians determine the amount of resources allocated to these public goods without a direct reference to consumers.

Question 27

What is provision of information?

Answer 27

They close information gaps by publications in the media, on the internet and in printed form that are designed to inform consumers about issues concerning products and services.

Question 28

What are the 3 main types of regulation?

Answer 28

A complete ban of the product

Regulation that place limits on the production process

Regulations relating to consumption of a product

Question 29

What are the advantages of regulation?

Answer 29

Regulation can limit the amount of pollution

It might act as an incentive to producers to develop new technologies that reduce pollution

It can limit external costs without an impact on price

Question 30

What are the disadvantages of regulation?

Answer 30

Enforcement of laws or regulation costs eg inspectors may have to be employed

There is a problem of determining the socially efficient level of pollution

It limits consumer sovreignty

Question 31

What is government failure?

Answer 31

Is when government intervention results in a net welfare loss.

Question 32

What causes a government failure?

Answer 32

Distortion of price signals

Unintended consequences

Excessive administrative costs

Information gaps

Question 33

How does government failure look like in different markets?

Answer 33

Indirect taxes: if very high might lead to smuggling

Agricultural stabilisation schemes: these schemes can result in massive surpluses which imply high storage costs

Housing policies: housing subsidies prevent the market from working efficiently

Environmental policies