Government intervention

Question 1

Define indirect tax

Answer 1

a tax imposed upon expenditure and is added to the selling price of the good. It is placed (levied) on the producer or supplier, raising firms’ costs of production.

Question 2

What are the main motivations behind setting taxes?

Answer 2

• Collecting revenue
• Discourage consumption of demerit goods
• Redistribute income within population
• Correct negative externalities

Question 3

Define welfare loss

Answer 3

The deadweight loss in terms of welfare benefits for society because resources are not allocated efficiently.

Question 4

Define subsidy

Answer 4

An amount granted by the government to a certain firm or industry. It is usually given per unit of output, decreasing the firm’s costs of production and therefore shifting the supply curve downwards by the amount of the subsidy.

Question 5

Reasons to grant subsidies

Answer 5

• Increase revenue for and protect producers. Focus on primary sector, who find it difficult with low prices
• Make necessities and basic goods affordable
• Support for growth of a particular industry
• Encourage exports, and protect domestic firms from imports
• Correcting positive externalities

Question 6

IS there welfare loss in subsidies?

Answer 6

Yes. Its a triangle looking thingie

Question 7

Define price control

Answer 7

A form of government intervention in the market of a good or service, where the price is set above or below the equilibrium price, preventing the market to clear and thereby creating surpluses or shortages.

Question 8

What are the possible consequences of a price ceiling?

Answer 8

• It produces shortages.
• It generates a rationing problem.- queues
• It promotes the creation of parallel (black) markets.
• It eliminates allocative efficiency and generates welfare loss.
• There are consequences for market stakeholders.
• Market size shrinks, less workers

Question 9

How could the government intervene to solve the negative consequences of a price ceiling?

Answer 9

• Subsidise local firms
• Government can provide it independently
• Store good before imposing price ceiling

Question 10

What are the possible consequences of a price floor?

Answer 10

• It produces surpluses.
• It promotes the creation of black markets.
• The government needs to dispose of the surplus.- dumping, donations, burn, store(additional costs)
• It might create firm inefficiency.
• It eliminates allocative efficiency and generates welfare loss.
• There are consequences for market stakeholders.