Govt intervention

Question 1

Regressive tax

Answer 1

A tax which takes a larger percentage of income from low-income earners than from high-income earners. The tax is assigned regardless of income.

Also occurs when a good that poorer people consume more is taxed such as cigarettes or alcohol

Question 2

What is Value added tax (VAT)

Answer 2

Is a consumption tax that is levied on a product repeatedly at every point of sale at which value has been added.

Question 3

What is VAT in the UK

Answer 3

20%

Question 4

Problem with a VAT

Answer 4

It is a flat tax meaning All consumers regardless of income pay the same percentage. Lower income earners may be effected harder

Question 5

What does a VAT exclude

Answer 5

The rate is reduced to 5% on certain purchases such as children’s car seats and home energy. There is no VAT on some items such as food and children’s clothing. Financial and property transactions also are exempt.

Question 6

Define market failure

Answer 6

the misallocation of scarce resources

Question 7

say 4 ways in which market failure can be caused

Answer 7

1. the existence of externalities (positive or negative)
2. inequality
3. information failure
4. Monopoly Power – when a firm controls the market (with high market share) and can set higher prices.

Question 8

how is the rationing function caused

Answer 8

1. when demand outstrips supply causing prices to rise

Question 9

what does an increase in market prices signal
1 for suppliers
2 for consumers

Answer 9

1. for suppliers it signalls them to increase supply of products
2. for consumers it may encourage them to choose cheaper alternatives

Question 10

Benefits of taxes

Answer 10

1. internalises the externality
2. can gain tax revenues which can be used to reinvest and hypothecate the externality
3. may cause firms to become more innovative in production to keep costs low

Question 11

3 evaluation points of indirect taxes

Answer 11

1. if demand is price inelastic consumption may not decrease
2. hard to assign correct level of tax as govt has imperfect info
3. can cause unemployment as demand for the product falls.
4. may reduce dynamic efficiency in the long term as revenues are smaller

Question 12

what is a subsidy

Answer 12

An amount of money provided to firms to help reduce production costs which can be passed on as lower prices.

Question 13

direct tax

Answer 13

taxes on incomes, wealth and profit
(this tax burden that cannot be passed on)
eg income tax

Question 14

indirect tax

Answer 14

taxes on consumption

Question 15

2. evaluation points of subsidy

Answer 15

1. opportunity cost (money may be better invested in healthcare)
2. subsidises can be self financing
3. firms may not use this subsidy for good use?

Question 16

3 evaluation points of income taxes

Answer 16

1. can cause a brain drain
2. increased tax avoidance
3. can decrease the incentive to work

Question 17

evaluation of free provision of services such as NHS or libraries

Answer 17

universal provision is not as effective as targeted provision.

Eg some areas in Cambridge may be better educated with heavier investment into school and may not need libraries. Whereas an area such as Glasgow north east

Question 18

Government failure definition

Answer 18

when an intervention leads to deeper market failure or new market failure is caused

Question 19

causes of govt failure

Answer 19

1. myopia -short termist views in order to win elections (may 2 2024)
2. info failures
3. regulatory capture
4. if the laws are not enforced

Question 20

what is internalising externalities

Answer 20

taxation attempts to make the producer pay for the full cost of externalities

Question 21

evaluation of pollution tax

Answer 21

1. can stunt growth

2. has to be a universal tax to ensure no economy in unfairly treated

Question 22

evaluation of an indirect tax

Answer 22

if the good is inelastic make consumers pay for the whole price of the tax. which can be regressive and widen inequality.

Question 23

what is maximum pricing

Answer 23

it is the highest price that a firm can set the price is usually set below equilibrium

Question 24

what are property rights

Answer 24

a legal right of ownership over a resource

Question 25

Why may property rights benefit the environment

Answer 25

there is better incentive to maintain the resource as firms are profit maximisers if producer have their own resource they are less likely to overexploit this for short term profits. instead they may better manage the resource to avoid extinction and guarantee longevity and sales in the future

Question 26

Why might the government intervene

Answer 26

When the invisible hand is not effective in allocating the socially maximum equilibrium

Question 27

What are the 4 economic assumptions

Answer 27

1. There are unlimited want but limited resources 2. There is an opportunity cost to every decision 3. each consumer seeks to maximise their satisfaction 4. The consumer is rational and will consider all costs and benefits before making a decision (homo economicus)

Question 28

what's the goal of market economies

Answer 28

to maximise profits

Question 29

what's the goal of public economies

Answer 29

to maximise social welfare and allocatively efficient

Question 30

what negative impacts may a market have if it is run by the government (command economies)

Answer 30

1. poor variety 2. lack of innovation to cut down prices 3. slower to react to changes in demand

Question 31

why do consumers over consume some demerit goods

Answer 31

1. goods may have addictive properties 2. information failure (undervalued long term impacts 3. social norm

Question 32

what is the diminishing marginal utility

Answer 32

the decrease in satisfaction a consumer has by consuming an extra good or service

Question 33

what does diminishing marginal utility show

Answer 33

why the demand curve is downward sloping

Question 34

why does rising incomes leas to diminishing marginal utility

Answer 34

1. if you have zero income then the first 100 means a lot as it finances food ect 2. if you are earning 1000's an extra hundred has less of an impact as it can't improve standard of living to the extent that the first 100£ did

Question 35

how to work out tax revenue on the diagram

Answer 35

work out the size of the tax per unit. (vertical distance between the two supply curves) the times it by the quantity where the tax is implemented

Question 36

how does an indirect tax cause an inward shift in supply

Answer 36

it increases the cost of production

Question 37

define market failure

Answer 37

This occurs when there is an inefficient allocation of resources in a free market

Question 38

what is the tragedy of the commons

Answer 38

where the is overconsumption in a particular good because rational decisions lead to an outcome which is damaging to overall welfare.

Question 39

what does the tragedy of the common assume

Answer 39

that everyone maximises utility. eg. If one individual fisherman holds back on his catch to try and preserve overall fish stocks, it may prove futile because many other fishermen continue to catch as much as possible. The net result is that fisherman don’t have any incentive to hold back, so they might as well try and catch as much as possible.

Question 40

how can government intervention help overcome the tragedy of the commons

Answer 40

1. limit fish catches 2. prevents fishermen from exploiting the seas to maximise profit as they risk a large a fine or other punishment otherwise

Question 41

evaluation of government regulation

Answer 41

1. if there is appropriate enforcement (if nobody checked speed cameras everyone would speed) 2. depends on what the punishment is (if you only had to pay a pound for speeding you would) This process is expensive (eg setting up speed cameras on every road in the UK)

Question 42

how can property rights help overcome the tragedy of the commons

Answer 42

1. if a common land is given ownership, the owner is given better incentive to manage the resource 2. in order to make long term profit

Question 43

evaluation of property rights in order to overcome the tragedy of the commons

Answer 43

the owner may be pressured by shareholders to increase profits and satisfy short term goals. this may result in the same problem

Question 44

free rider problem

Answer 44

when individuals can consume a good without paying. This is why public goods are not provided in the free market.

Question 45

why is the free rider problem so likely

Answer 45

because individuals are rational utility maximisers and will look to benefit from a public good without having to pay for it.

Question 46

what are ways information can be provided to combat obesity

Answer 46

eg the number of calories a meal is now displayed in restaurants so consumers can make the correct decision Adverts to parents

Question 47

examples of industries that suffer from regulatory capture

Answer 47

OFGEM- office of gas and electricity markets | oil and gas drilling regulators in the US- made it easier to drill in offshore areas.

Question 48

how may regulatory capture occur

Answer 48

1. bribery and corruption 2. Spending time with people makes you more sympathetic to their viewpoint. If the regulator is in close contact and communication

Question 49

consumer surplus

Answer 49

the difference between the price that consumers pay and the price that they are willing to pay

Question 50

how can firms reduce consumer surplus

Answer 50

if the are a monopoly or have brand loyalty they can charge higher prices

Question 51

producer surplus

Answer 51

the difference between the price a firm receives and the price it would be willing to sell it at.

Question 52

what is regulation

Answer 52

Rules or law implemented by the government that must be abided by economic agents to encourage change in behaviour

Question 53

examples of regulation

Answer 53

1. no diesel cars by 2030 2. public smoking ban (can't smoke in enclosed areas) 3. deposit return scheme (people are charged higher prices for plastic but are given some money when recycled)

Question 54

evaluation on a ban of an inelastic good

Answer 54

a ban on a good such as cigarettes which has addictive properties isn't likely to stop a smoker from smoking. they are just going to do it somewhere else

Question 55

evaluation of the deposit return scheme

Answer 55

1. Some consumers may be too lazy/ busy to return their goods and the money that they could be given is too little for the utility they gain by staying at home (spending more time with family) 2. some consumer may not need the money and therefore may not be attracted to recycle

Question 56

what is a pollution permit

Answer 56

Pollution permits involve giving firms a legal right to pollute a certain amount. The aim is to provide market incentives for firms to reduce pollution If firms pollute less than expected they can sell them creating a market

Question 57

problems with using pollution permits

Answer 57

1. similarly to taxes its hard to assign the right level of pollution permits. 2. Pollution permits may be unfairly allocated. those high profit making firms will buy all permits and may increase barriers to entry as new entrants can't pollute which may be required in some industries THEY SHOULD BE PHASED OUT OVERTIME TO REDUCE THE RELIANCE

Question 58

Tradable pollution permits

Answer 58

Permit to reduce co2 emissions

Question 59

Tradable pollution permits chain of reasoning

Answer 59

Cap set a Q -socially optimum Permits issued to match the cap Firms make decision on least cost - permits or new technology With the required enforcement Pollution decreases to socially optimum, allocative efficiency Always LR incentive to invest in LR (Profit from selling and wont be burdened when permit prices rise as gov reduces amount of permits in order to incentive green tech)

Question 60

Tradable pollution permits evaluation

Answer 60

Enforcement = expensive and resources Imperfect info for gov = risk of gov failure Unintended consequences = move country or close firms or higher prices for consumer Need for international cooperation to have an effect