Government Intervention

Question 1

Learn government intervention: effect of a specific tax diagram in a PC market
Include: all areas, effect on industry and a firm

Answer 1

Now

Question 2

Define deadweight loss?

Answer 2

The fall in total surplus resulting from a market distortion

such as tax, is called the deadweight loss

Question 3

Learn ad valorem tax diagram

All areas

Answer 3

Now

Question 4

What is an ad valorem tax? Why does this lead to unparalleled supply lines when it is imposed?

Answer 4

It is a tax levied based on the value of goods (eg. VAT)

The lines are not parallel because the amount of tax paid is smaller at lower prices

Question 5

Welfare effects of a price floor diagram
All areas (inc. if gov destroys or gives excess to schools, cost to taxpayer)

Answer 5

Now

Question 6

Define price floor?

Answer 6

A legal minimum price at which a good can be sold (eg. Milk)

Question 7

Define market failure?

Answer 7

A situation in which market on its own fails to produce an efficient allocation of resources

Question 8

4 causes of market failure?

Answer 8

Externalities
Public goods
Market power
Incomplete information

Question 9

Define a negative externality?

Answer 9

A cost imposed on a third party

Question 10

Define a positive externality?

Answer 10

A benefit to a third party

Question 11

Learn negative externality diagram:

Compare actual surpluses to social optimum surpluses

Answer 11

Now

Question 12

Define marginal social cost?

Answer 12

The full cost of producing another unit of a good, including the marginal cost to the producer and any harm caused to third parties

Question 13

Total welfare under negative externality = ?

Answer 13

Prod surp + cons surp - external cost

Question 14

What is meant by internalising the externality?

Answer 14

Altering incentive so that consumers and producers take account of the external effects

Question 15

What is a pigovian tax?

Answer 15

A tax imposed on an activity that creates a negative externality

Question 16

Optimum tax = ?

Answer 16

MSC - MC

Equal to the negative externality created by each unit

Question 17

Issue with pigovian taxes?

Answer 17

Can be hard to estimate exact size of externality therefore tax may do more harm than good

Question 18

Define a quota?

Answer 18

A regulation mandating that the production or consumption of a certain quantity of a good or externality be limited

Question 19

Learn quota diagram

Answer 19

Now

Question 20

Define tradeable permit?

Answer 20

A government issued permit that allows a firm to emit a certain amount of pollution during production and that can be traded to other firms

Question 21

Two ways to correct for monopoly power?

Answer 21

Lump sum tax

Price ceiling

Question 22

Define lump sum tax?

Answer 22

A tax of a fixed amount, independent of the output produced (fixed cost to a firm)

Question 23

Draw lump sum tax diagram for a monopoly:

All areas

Answer 23

Now

Question 24

Draw price ceiling correction of monopoly diagram:

All areas

Answer 24

Now

Question 25

How does a price ceiling eliminate the deadweight loss?

Answer 25

By setting a price ceiling equal to the epics that would be were the industry perfectly competitive, the deadweight loss would be eliminated

Question 26

Draw market power and negative externality and pigovian tax diagram: and explain

Answer 26

Now

Question 27

Optimum tax for market power negative externality pigovian diagram?

Answer 27

Optimum tax < MSC - MC

See explanations