Government Intervention

Question 1

Examples of Minimum Prices:

Answer 1

• Minimum wage
• Minimum prices to protect producers (e.g. farmers, fishermen)
• Minimum Prices to reduce consumption (e.g. sugar, Alcohol)

Question 2

Example of Maximum Price:

Answer 2

Rent price caps

Question 3

Define Indirect tax

Answer 3

An indirect tax is a tax on expenditure (goods and services) rather than a tax on income and wealth

Question 4

What is a specific/unit tax

Answer 4

A fixed amount of tax per unit sold. the amount of tax levied does not change with the price

Question 5

What is Ad-Valorem tax

Answer 5

A tax paid as a percentage of the price. The amount of tax levied does increase as the price increases

Question 6

Why does the government tax

Answer 6

Income Distribution (equity)
Market failure (over consumption)
Improve allocations of resources
Money for the gov. (fund projects)
Dissuade unhealthy living (e.g. sugar, tobacco)

Question 7

What is tax incidence

Answer 7

Who takes the burden of a tax,

The producer pays the tax to the gov. but how much of the tax can the producer pass on with higher prices

Question 8

What does the tax incidence depend upon

Answer 8

the elasticity of S & D

Question 9

What is dead weight loss

Answer 9

The loss of economic welfare from an inefficient market outcome

Question 10

Define a subsidy

Answer 10

a grant given by a government to encourage the production or consumption of a good

Question 11

Why do governments subsidise

Answer 11

Encourage merit goods (e.g. renewable energy, food)
Support consumers (medication)
Supporting producers (fishermen with housing)