Government intervention pt2

Question 1

Taxes

Answer 1

Can be used as a way to discourage consumption of certain goods. E.G. tax on demerit goods. Creates revenue for the government but hard to know how much to tax, may encourage tax evasion.

Question 2

Taxes diagram

Answer 2

-Increases COP, limits supply
-Quantity supplied decreases to Q1 and price increases to P1
-Tax revenue is shown by shaded area, ABCP1
-Could be used to limit consumption or production

Question 3

Subsidies

Answer 3

Benefit given to firms by the government to lessen their cost to produce and encourage production. e.g. public transport, education.

Question 4

Subsidies diagram

Answer 4

-Lowers COP, increases supply
-Quantity supplied increases to Q1 and price decreases to P1
-Subsidy shown by shaded area ABCP1
-Could encourage firms to produce as it is cheaper

Question 5

What can subsidies solve?

Answer 5

-Some positive externality market failures
-Monopoly market failure
-FOP immobility market failure

Question 6

Subsidies disadvantages

Answer 6

-More spending for government (less available elsewhere), budget deficit
-If too much is given to firms and prices are lowered too much it may cause a shortage of goods
-Possibly not enough to help lower their costs

Question 7

What government intervention is needed for each type of market failures? Pt1

Answer 7

Public goods-Taxes to help free rider problems
Externalities-min price for consumption (neg), taxes for production (neg), subsidy (pos)
Merit and demerit goods-min price (demerit), taxes (demerit), subsidy (merit)

Question 8

What government intervention is needed for each type of market failures? Pt2

Answer 8

Monopoly-Subsidy
Inequalities-max price
FOP immobility-subsidies