Government Policies that Reduce Efficiency

Question 1

why can government intervention lead to market failure

Answer 1

certain policies may distort the price system leading to over/under production

Question 2

what are the 4 government intervention policies that may reduce efficiency

Answer 2

1. market restrictions
2. price controls
3. taxes on g/s
4. subsidies paid to certain industries

Question 3

explain market restriction and what it causes

Answer 3

the gov restricts the supply of a good or service making the market non competitive and inefficient this causes a decrease in total surplus and DWL

Question 4

explain the taxi market as a market restriction

Answer 4

1. the gov increased the cost of getting a taxi license to around ($30000-$700000) which restricted market supply (increased taxi fare and decreased quantity provided)
   UBER was introduced to increase competition

Question 5

Explain who benefited from this taxi market restriction and what the National Competition Council did about it

Answer 5

Only the taxi industry benefited (higher profits) and the government (higher license fee) not consumer
The National Consumer Council said the restriction was not justified as benefiting the whole community

Question 6

On the demand/supply graph draw and explain when there is 1. no restriction and when 2. there is restriction

Answer 6

no restriction = competitive equlibrium
market price/quantity will be efficient
total surplus will be maximised

restriction = equilibrium not achieved
supply of taxis becomes fixed (vertical straight line)
price rises and there is shortage
total surplus decreases and DWL

Question 7

what is a price control

Answer 7

government regulated price that set prices either above or below equilibrium

Question 8

what is a price ceiling

Answer 8

a legislated maximum price that sellers are allowed to charge in the market to benefit low income consumers by keeping price below eql

Question 9

what are 2 effects of the price ceiling

Answer 9

1. shortage = quantity demanded > quantity supplied

2. increase in consumer surplus but producer surplus decreases by more = DWL

Question 10

explain the input of a price ceiling in the petrol market (effect on consumers and producers wellbeing)

Answer 10

if a petrol price ceiling is put in place some consumers are happy for a cheaper price but there is shortage so some consumers are unhappy because no petrol
producers lose out because they sell less petrol for less money

Question 11

what is a price floor

Answer 11

a legislated minimum price that sellers are allowed to charge designed to benefit producers to increase market price to help low income producers

Question 12

what are 2 effects of a price floor

Answer 12

1. surplus: quantity sellers are willing to sell > quantity demanded
2. increase producer surplus but consumer surplus decreases by more causing DWL

Question 13

explain the input of a price floor using pizza as an example and draw this on the graph

Answer 13

gov increases price of pizza so that producers get more money. quantity supplied increases and quantity demanded decreases
producers get more money but consumers are paying more for less

Question 14

why does gov impose tax

Answer 14

to raise revenue for community spending programs

Question 15

what happens when tax is imposed

Answer 15

the supply curve will rise by the amount of tax - price increases and quantity falls

Question 16

how do buyers and sellers share the burden of tax

Answer 16

CONSUMERS - must payer more and receive less which decreases consumer surplus
PRODUCERS - receive less money and sell fewer quantity which decreases producer surplus

Question 17

who gains from tax

Answer 17

tax raises gov revenue to be injected back into society which (tax revenue is smaller than the loss in total surplus) therefore DWL will always be created bc the market has shrunk and output is smaller

Question 18

taxes are necessary but the objective should be to put tax on goods where DWL will be reduced (what are 2 factors that determine size of DWL)

Answer 18

1. The larger the tax = the greater decreases in economic activity = the bigger DWL
2. Elasticity of Demand
   inelastic: small impact on quantity-small DWL (high tax)
   elastic: large impact on quantity-large DWL (low tax)

Question 19

what is a subsidy

Answer 19

a grant paid to a producer by gov with the purpose of reducing costs and increasing ouput

Question 20

what happens when subsidy is imposed

Answer 20

the supply curve falls by the amount of subsidy causing price to decrease and quantity to rise

Question 21

explain how the burden of subsidy is shared by buyers and sellers

Answer 21

CONSUMERS- pay less and recieve more (consumer surplus increases)
PRODUCERS - recieve more money and sell more (producer surplus increases)

Question 22

what is the formula for government revenue

Answer 22

gov rev = tax amount x quantity sold

Question 23

explain why a subsidy is inefficient (state formula)

Answer 23

the cost of a subsidy is greater than the combined increase in consumer/producer surplus
Cost of

Question 24

explain why a subsidy is inefficient (state formula)

Answer 24

the cost of a subsidy is greater than the combined increase in consumer/producer surplus so subsidy decreases total surplus therefore DWL
Cost of subsidy = subsidy amount x quantity

Question 25

explain the car industry in australia as an example of the negative effects of subsidy

Answer 25

Aus Gov used to subsidise this industry with tax payers paying up to $50000 per employee
car making died in Aus because the gov could no longer afford to waste tax payer dollars on an inefficient and unsustainable industry