Government Intervention

Question 1

What do governments use indirect tax for?

Answer 1

To affect the supply of some goods/services

Question 2

What are the two types of indirect tax?

Answer 2

Specific tax & Ad Valorem tax

Question 3

What is a specific tax?

Answer 3

A fixed amount that is charged per unit of a particular good, no matter what the price of the good is

Question 4

What is an Ad Valorem tax?

Answer 4

Taxes that are charged as a proportion of the price of a good

Question 5

What is the effect of indirect tax on producers?

Answer 5

They increase their costs, causing the supply curve to shift left

Question 6

What goods do governments normally put indirect taxes on?

Answer 6

Goods that have negative externalities

Question 7

What is the aim of taxation on negative externalities?

Answer 7

To internalise the externality, the additional tax creates revenue for the government, they can use this money to offset the effects of the good

Question 8

What does the amount of tax passed on to the consumer depend on?

Answer 8

The PED of the good, if the good is inelastic most of the extra cost will be passed on to the consumer, if it is elastic most of the extra cost will be absorbed by the producer

Question 9

What are the advantages of taxation?

Answer 9

• The costs of negative externalities is internalised
• If the demand for the good doesn’t reduce, there is still benefit that the revenue gained by the government can be used to offset externalities

Question 10

What are the disadvantages of taxation?

Answer 10

• It can be difficult to put a monetary value on the cost of the negative externalities
• Demand for the good will not be reduced if the good is price inelastic
• Firms may choose to relocate to avoid the indirect tax, which would mean they would not be paying tax anymore
• The money from the taxes may not be spent on internalising the externality

Question 11

What is a subsidy?

Answer 11

Money paid to producers by the government to encourage the production and consumption of goods and services with positive externalities

Question 12

What are the advantages of subsidies?

Answer 12

• The benefit of goods with positive externalities is internalised, the cost of the externality is covered by the government subsidy
• Subsidies can change preferences
• Positive externalities are still present
• Subsidies can support a domestic industry until it can exploit economies of scale and become internationally competitive

Question 13

What are the disadvantages of subsidies?

Answer 13

• It is difficult to put a monetary value on the benefit of the positive externalities
• Subsidies have an opportunity cost
• Producers may become reliant on the subsidies
• ## Effectiveness of subsidies depends on elasticity of demand

Question 14

What are price controls?

Answer 14

A limit set by the government on a good or service

Question 15

Why does the government set maximum prices on goods and services?

Answer 15

To increase consumption of a merit good, or to make a necessity more affordable

Question 16

Why does the government set minimum prices on goods and services?

Answer 16

To make sure suppliers get a fair price

Question 17

What are the advantages of maximum price?

Answer 17

• Help increase fairness
• Can prevent monopolies from exploiting customers

Question 18

What are the disadvantages of maximum price?

Answer 18

• Since demand is higher some people who want to buy the product won’t be able to
• Governments may need to introduce a rationing scheme to allocate the good
• Excess demand can lead to a black market for the good

Question 19

What are the advantages of minimum price?

Answer 19

• Producers will have a guaranteed minimum income, which encourages investment
• Stockpiles can be used when supply is reduced

Question 20

What are the disadvantages of minimum price?

Answer 20

• Customers will be paying a higher price than the market equilibrium
• Resources used to produce excess supply could be used elsewhere - inefficient allocation of resources
• Destroying excess goods is a waste of resources

Question 21

What is state provision?

Answer 21

When the government provides certain goods or services

Question 22

What are some advantages of state provision?

Answer 22

• Reduces inequalities in access
• Can redistribute income effectively

Question 23

What are some disadvantages of state provision?

Answer 23

• Less incentive to operate efficiently
• May fail to respond to consumer demands as it lacks motive of profit to determine what’s supplied

Question 24

What is privatisation?

Answer 24

The transfer of the ownership of a firm/industry from the public sector to the private sector

Question 25

What are disadvantages of privatisation?

Answer 25

• Privatised firms have less focus on safety and quality, more focussed on reducing costs and increasing profits
• Private firms may need regulating to prevent private monopolies

Question 26

What are advantages of privatisation?

Answer 26

• Increased competition improves efficiency
• Improves resource allocation
• Enable the building of important facilities that the government may not be able to afford
• Government gain revenue from selling firms

Question 27

What are regulations?

Answer 27

Rules enforced by the government, usually backed up with legislation, which means legal action can be taken against those who break them

Question 28

What is deregulation?

Answer 28

When rules are removed to lower barriers to entry and to encourage competition

Question 29

What are the advantages of deregulation?

Answer 29

• Improves resource allocation
• Can prevent private monopolies

Question 30

What are the disadvantages of deregulation?

Answer 30

• Difficult to deregulate some natural monopolies
• Deregulation can’t fix market failure such as negative externalities
• May mean there is less safety and protection for customers

Question 31

What is competition policy?

Answer 31

Rules that make sure businesses are competing fairly with each other

Question 32

What does competition policy aim to do in a market?

Answer 32

Increase competition

Question 33

What authority monitors competition?

Answer 33

Competition and Markets Authority (CMA)

Question 34

What are pollution permits?

Answer 34

Regulated allowances that allow a producer to emit a certain level of pollution in a period of time

Question 35

What are advantages of pollution permits?

Answer 35

• They encourage firms to be more efficient and pollute less
• Governments can use any revenue from fines to invest in other pollution reducing schemes

Question 36

What are disadvantages of pollution permits?

Answer 36

• Optimal pollution level can be hard to set
• Pollution permit scheme creates new market, may result in market failure
• High levels of pollution by those with multiple pollution permits

Question 37

What is nationalisation?

Answer 37

When a government takes control of a firms/industry that was previously privately owned

Question 38

What is government failure?

Answer 38

When government intervention causes a misallocation of resources