Government intervention

Question 1

Indirect taxation

Answer 1

taxes on expenditure of goods and services e.g. VAT (main indirect tax in UK), alcohol tax
Can be ad valorem (percentage tax by value) or specific (set tax per unit e.g. 58p per litre fuel duty)

Question 2

How elasticity effects ad valorem tax

Answer 2

If inelastic (alcohol) consumers pay larger burden of tax discouraging consumption of demerit good reducing negative externalities

Government revenue is larger if inelastic as demand falls only slightly with the tax

Question 3

How elasticity effects specific tax

Answer 3

The more inelastic the demand, the higher the tax burden for the consumer, and the lower the burden of tax for the producer

Question 4

Indirect taxes could reduce the quantity of demerit goods consumed by

Answer 4

increasing the price of the good.

Question 5

If the tax is equal to the external cost of each unit

Answer 5

then the supply curve becomes MSC rather than MPC so the free market equilbibrium becomes the socially optimum equilibrium thus internalising the externality

Question 6

Define subsidy

Answer 6

a payment from the government to a producer to lower their costs of production and stimulate an increase in supply

Question 7

Subsidies encourage the ______

Answer 7

consumption of merit goods - this includes the full social benefit in the market price of a good internalising the external benefit.

Question 8

The government might subsidise recycling schemes so that

Answer 8

it is cheaper for consumers to recycle waste which will yield positive externalities for the environment

Question 9

The vertical distance between supply curves shows the

Answer 9

Value of the subsidy per unit

Question 10

When demand is price inelastic, consumers…. and producers…

Answer 10

consumers gain more form the subsidy whilst producers supply less than if it was elastic demand

Question 11

The disadvantages of subsidies include

Answer 11

the opportunity cost to the government and potential higher taxes
the potential for firms to become inefficient if they rely on the subsidy and government failure if inefficient firms can carry on supplying because of subsidy ,

Question 12

Triangles either side of consumer and producer tax burdens are

Answer 12

welfare loss

Question 13

Maximum price

Answer 13

a regulated maximum price is a set price (below market equilbirium) that a good must be sold for less than so it doesn’t get too expensive and encouraging consumption or production good

Question 14

Why maximum price is good

Answer 14

prevent monopolies exploiting consumers

leads to welfare gains for consumers as prices low and increase efficiency in firms due to incentive to keep costs low to maintain profit levels

Question 15

Evaluation of maximum price

Answer 15

reduce firms profits less investment in long run so firms raise price of other goods so consumers have no net gain

could lead to government failure if misjudge where market price is

Question 16

Minimum price

Answer 16

a regulated minimum price is a set price (above market equilbirium) that a good must be sold for more than so it doesn't get too cheap and discouraging consumption or production good 
 e.g. national minimum wage
reduce negative externalities
but increase black market 
elasticity

Question 17

Tradeable permits allow

Answer 17

regulated quantities of something to be bought or sold

Question 18

Tradeable pollution permits help

Answer 18

limit negative externalities in the form of pollution - firms allowed to pollute up to a certain amount and any surplus on their permit can be traded

Question 19

Advantages of tradeable pollution permits e.g. EU emission trading schame

Answer 19

benefit environment in long run by encouraging firms to use green production methods

raise government revenue as they can sell permits to firms which can be reinvested in green technology

internalises externality

incentive for firms to invest in greener methods

market created with fixed supply and greatest level of output for any given level of pollution as permits allocated efficiently

regulation part gives certainty over total level of pollution

Question 20

Disadvantages of tradeable pollution permits e.g. EU emission trading schame

Answer 20

Firms relocating to where they can pollute without limits reducing their production costs

pass higher costs of production onto consumers

competition restricted if permits create a barrier to entry for potential firms

creates idea of firms battling pollution

pollution concentrated in hot spots

high administrative costs associated with monitoring pollution emissions

Money spent on firms, cost of production up, supply down, price up
If PED>1 then large fall in QD so drop in profits however if inelastic then small fall in QD

Question 21

Why are tradeable permits better than regulation

Answer 21

permits end up with those who need it the most creating efficiency - greatest output per pollution

Question 22

Why are tradeable permits better than taxation

Answer 22

• control quantity of pollution

- price of permit determined by market whereas tax levels are just an arbituary number with no economic value

Question 23

Why are tradeable permits worse than regulation

Answer 23

• big firms can bypass permits as can buy more permits rather than cutting pollution and if create too many the price of permits is so low it doesn’t reduce pollution (30 billion permits)

Question 24

Why are tradeable permits worse than taxation

Answer 24

• increases government revenue rather than firms getting revenue from selling permits

Question 25

State provision of public goods

Answer 25

The government could provide public merit goods making them more accessible increasing their consumption and positive externalises but could be expensive incurring an opportunity cost on their revenue

Question 26

Reason for market failure in industry

Answer 26

Monopolies (e.g. breaking up monopoloy of BAA airports), asymmetric information

Question 27

Privatisation

Answer 27

When government firms are given to private sector giving a profit incentive increasing productivity e.g. British gas, telecoms, airways

Question 28

Provision of information

Answer 28

Governments provide information to prevent information failure so consumers and firms make more informed economic decisions e.g. make it illegal for second hand car dealers not to reveal entire history of car or improve health care information

Question 29

Regulation

Answer 29

use laws to ban consumption of a good e.g. minimum age of alcohol - reduce negative externality

Question 30

Negatives of regulation

Answer 30

high administrative costs of policing, rise in black market sales, raise costs of firms who pass costs onto consumers

Question 31

How to depict revenue for government (tax) or total cost to government (subsidy)

Answer 31

New equilibrium, vertically down, price axis

(box underneath is tax/subsidy revenue/cost for suppliers