Government Intervention in the Markets

Question 1

Tax Incidence

Answer 1

Tax incidence is the distribution of the burden of tax between firms and consumers.

Question 2

Subsidy

Answer 2

A subsidy is a payment made by the government to a firm to lower the cost of production and therefore increase supply. A subsidy will lead to a fall in the cost of production. When this happens, firms will decrease price by the amount of the subsidy at each quantity supplied to maintain competitiveness. In other words, they will increase quantity supplied at each price which will lead to an increase in supply.

Question 3

Subsidy Incidence

Answer 3

Subsidy incidence is the distribution of the benefit of subsidy between firms and consumers.

Question 4

Maximum Price

Answer 4

A maximum price, or a price ceiling, is the highest price that firms are legally allowed to charge. The government may set a maximum price on a good to prevent the price from rising above a certain level in order to ensure the affordability to consumers. A non-binding maximum price is a maximum price set above the equilibrium price. A binding maximum price is a maximum set below the equilibrium price. A binding maximum price will lead to a fall in the price resulting in an increase in the quantity demanded and a decrease in the quantity supplied. Therefore, a binding maximum price will lead to a shortage.

Question 5

Indirect Tax

Answer 5

An indirect tax is a tax imposed on a good or service. Examples include goods and services tax and excise tax. There are two types of indirect taxes: specific tax and ad valorem tax. A specific tax is an indirect tax of a certain amount per unit sold. An example is the excise tax on cigarettes in Singapore which is $0.388 per cigarette. An ad valorem tax is an indirect tax of a certain percentage of the price of the good. An example is the goods and services tax in Singapore which is 7 per cent of the price of a good or service.

Question 6

Direct Tax

Answer 6

A direct tax is a tax imposed on income or wealth. Examples include personal income tax and corporate income tax

Question 7

Tax

Answer 7

A tax is a levy imposed on a good, service, income or wealth by the government. Taxes are often classified into direct taxes and indirect taxes. A direct tax is a tax imposed on income or wealth. Examples include personal income tax and corporate income tax. An indirect tax is a tax imposed on a good or service. Examples include goods and services tax and excise tax.