Govt. Intervention

Question 1

Reasons to grant subsidies

Answer 1

1. increase producer’s revenue
2. make basic necessities and merit goods more affordable
3. encourage the consumption of merit goods
4. support the growth of a particular industry
5. encourage exports and protect national industries from foreign competition
6. correct positive externalities

Question 2

Effect of subsidies on consumers

Answer 2

better off because they pay a lower price and consume a greater amount

Question 3

Effect of subsidies on producers

Answer 3

better off because they sell a greater amount and receive a higher final price after receiving the subsidy

Question 4

Effect of subsidies on the govt

Answer 4

worse off because they have to cover the cost of the subsidy

Question 5

Effect of subsidies on workers

Answer 5

better off because the market size increases, which leads to higher employment

Question 6

Reasons to set taxes

Answer 6

1. collect govt revenue
2. discourage consumption of demerit goods
3. redistribute income within the population
4. correct negative externalities

Question 7

Effect of taxes on consumers

Answer 7

worse off because they end up paying a higher price and consuming a smaller amount of the good

Question 8

Effect of taxes on producers

Answer 8

worse off because they end up selling a smaller amount and receiving a lower final price after paying tax to the govt.

Question 9

Effect of taxes on the govt.

Answer 9

better off because it collects revenue from the tax

Question 10

Effect of taxes on workers

Answer 10

worse off because the market becomes smaller, which leads to some workers being fired

Question 11

aims of price floors

Answer 11

1. increase the income of producers of goods/services the govt deems important
2. protect workers by setting a minimum wage

Question 12

consequences of price floors

Answer 12

• produces surplus
• creates black markets
• govt needs to dispose of surplus
• eliminates allocative efficiency (creates welfare loss)
• might create firm inefficiency

Question 13

effect of price floors on consumers

Answer 13

worse off because they end up consuming a smaller amount at a higher price

Question 14

effect of price floors on producers

+ effect on revenue

Answer 14

the revenue depends on PED (inelastic=more ; elastic=less)

overall, will be better off if the govt purchases the supply because they will sell a higher amount and receive a higher price

Question 15

effect of price floors on the govt.

Answer 15

worse off because they usually buy the excess supply and have to either store it or sell it to other countries

Question 16

effect of price floors on workers

Answer 16

better off because the market size will increase, so employment will increase

Question 17

aims of price ceilings

Answer 17

1. increase consumption of the good/service
2. reduce the price of the good/service for low-income consumers

Question 18

consequences of price ceilings

Answer 18

• produces shortages
• generates a rationing problem
• creates black markets
• eliminates allocative efficiency (generates welfare loss)

Question 19

effect of price ceilings on consumers

Answer 19

those who get to buy the good at a lower price than before are better off

those who don’t get to consume it at all are worse off

Question 20

effect of price ceilings on producers

Answer 20

worse off because they produce less of the good and receive a lower price for it, so their total revenue falls

Question 21

effect of price ceilings on workers

Answer 21

worse off because the size of the market decreases, so unemployment will increase