Government Intervention Pt 1. Indirect Tax, Specific and Ad Valorem Tax,

Question 1

Government Intervention

Answer 1

Government intervention is regulatory action taken by government to rectify market failure by changing the free market equilibrium / outcome.

Question 2

Indirect Tax

Answer 2

A charge levied onto produces to increase their costs of production.

Extra:
Supply curve shifts inwards which decreases the quantity equilibrium whilst increasing the price equilibrium which means less people are consuming and providing it.

Question 3

Specific Tax

Answer 3

Also known as unit tax, a fixed charge levied onto each unit of output.

Question 4

Ad-Valorem Tax

Answer 4

Also known as percentage tax, is calculated a certain percentage of the selling price.

Question 5

Objectives of Indirect Tax

Answer 5

1) To decrease the production and consumption of demerit goods to a socially responsible level
2) To decrease negative externalities of both production and consumption of demerit goods
3) Encourage production and consumption of merit goods by subsidising with the tax proceeds from demerit goods.

Question 6

Incidence of Taxation

Answer 6

Upon who the tax burden falls onto. How much onto the producers and consumers.

Question 7

Subsidy

Answer 7

It is a grant given by the government to the producers to decrease their costs of production.

How?
The supply curve shifts outwards, decreasing the price equilibrium whilst increasing the quantity equilibrium. This means more people can purchase it (QD) while the QS increases.

Question 8

Objective of Subsidy

Answer 8

1) To increase the production of merit goods
2) To increase positive externalities of both production and consumption
3) To increase income inequality through lowering prices of fuel, energy, houses, etc.

Question 9

Gain of Subsidy

Answer 9

The incidence of subsidy onto firm then consumer.

Question 10

Evaluation of Subsidy

Answer 10

1) PED:
Goods like necessities with a low PED (<1) will require a bigger scale of subsidy to ensure that the percentage change of QD is bigger than the percentage change in price to increase consumption of that good proportionately.

2) Expensive:
Govt may have to increase taxes from other sectors to be able to subsidies targeted areas.

3) Risk:
Govt investment is a huge risk as they might be possibilities of info failure by the Govt which leads to unlikelihood or uncertainty of the success of the policies.