IB Government in microeconomics

Question 1

Define dead weight loss/welfare loss (2)

Answer 1

failure to reach allocative efficiency

not producing at equilibrium

Question 2

Possible reasons for government intervention (7)

Answer 2

to earn government revenue

to support firms

to support low income households

to influence production level

to influence consumption level

to correct market failure

to promote equity/equality

Question 3

Government revenue as a reason for government intervention (3)

Answer 3

revenue from indirect taxes on goods/services

lower PED of good = greater amount of tax revenue

funding government projects + budgets

Question 4

Supporting firms as a reason for government intervention (5)

Answer 4

may be for economic, political, strategic reasons

small firms which require financial assistance to compete with larger firms

supporting firms in industry gov. wants to promote

offering subsidies + price flows

protecting domestic firms from foreign (trade protection, tariff, quota)

Question 5

Supporting low income households as a reason for government intervention (2)

Answer 5

improve quality of life for all citizens

using subsidies, price ceilings, direct provision of services (education + healthcare),

Question 6

Influence levels of production as a reason for government intervention (2)

Answer 6

subsidies, price floor, trade protection to increase production

indirect taxes on industries/products they want to diminish

Question 7

Influence level of consumption as a reason for government intervention (2)

Answer 7

may increase consumption of goods/services that are beneficial (merit good)

may diminish consumption by adding indirect tax on demerit goods

increase consumption through : direct provision, subsidies, nudges, law + regulation,

Question 8

Define market failure (2)

Answer 8

inefficient allocation of resources

market failure = market is producing too litte/much goods/services in relation to how much society prefers

Question 9

Equity/equality as a reason for government intervention

Answer 9

improve equity of income distribution

Question 10

Define price control (3)

Answer 10

setting minimum or maximum price by government

prices unable to adjust to market equilibrium

result in market disequilibrium (surplus or shortage)

Question 11

Define price ceilings (2)

Answer 11

government set maximum price of good/service which is below equilibrium price

e.g affordable housing, low-cost food

Question 12

Reasons for price ceiling

Answer 12

make certain goods more affordable to low income groups

Question 13

Consequences of price ceilings (5)

Answer 13

creates shortages

rationing

promotes creation of black markets (illegal)

eliminates allocative efficiency

creates welfare/deadweight loss

Question 14

Price ceiling shortage

Answer 14

not all interested buyers willing/able to buy good

Question 15

Price ceiling rationing (3)

Answer 15

dividing good amongst possible consumers

free market rationing - good given to those willing/able to pay for it

price mechanism no longer achieves rationing function during shortage

Question 16

Non-price rationing (3)

Answer 16

first come first serve

distribution of coupons

favoritism - seller can sell good to preferred customer

Question 17

Price ceiling black markets (2)

Answer 17

unrecorded buying and selling which is usually illegal

involves buying good at maximum legal price then reselling at a higher price

Question 18

Eliminates allocative efficiency

Question 18

Consequences of price ceilings for consumers

Answer 18

shortage - some consumers unsatisfied as there are not enough of the good

Question 19

Consequences of price ceilings for producers (2)

Answer 19

producers worse off - sell smaller quantity of good at lower price

revenue drops from Pe x Qe to P x Qs

Question 20

Consequences of price ceilings for workers

Answer 20

fall in output Qe to Qs –> workers likely to be laid off –> unemployment

Question 21

Consequences of price ceilings for government

Answer 21

may gain political popularity among consumers who are better off due to price ceiling

Question 22

Solution to problems of price ceilings (7)

Answer 22

increase supply through subsidies to consumers

tax breaks to lower production costs

investments in infrastructure

research + development - technological advancements

improve labor supply + skills - inrease productivity

reduce regulation - make it easier to produce

encourage foreign investment

Question 23

Consumer/Producer expenditure

Answer 23

price per unit of good x no. of goods purchased

Question 24

Define price floor (2)

Answer 24

governments setting a minimum price of a good/service higher than equilibrium

producers must charge higher than the price floor

Question 25

Reasons for price floors (2)

Answer 25

protect producers that could be in danger

protect workers (minimum wage)

Question 26

Consequences of price floors (4)

Answer 26

Surpluses - government needs to dispose of surplus

firm inefficiency

allocative inefficiency

welfare loss

Question 27

Government measures to dispose of subsidies as a consequence of price floors (3)

Answer 27

gov. makes decision about what to do with excess surplus bought

storing excess surplus

exporting surplus - sometimes needs subsidy to compete with foreign goods

Question 28

Firm inefficiency as a consequence of price floors (2)

Answer 28

no competition - gov. buying excess surplus

no incentive to reduce costs + increase productivity + research

Question 29

Market inefficiency as a consequence of price floors

Answer 29

overallocation of resources due to increased quantity supplied due to price increase

Question 30

Welfare loss as a consequence of price floors

Question 31

Calculating how much gov. will spend on surplus for price floor

Answer 31

Price floor(Qs - Qd)

Question 32

Consequence of price floors for consumers (2)

Answer 32

must pay higher price

loss of consumer surplus

Question 33

Consequences of price floors for producers (4)

Answer 33

receive higher price to sell goods

gov. buys up surplus = more revenue

producers protected from low-cost production

no incentives to become more efficient

Question 34

Consequences of price floors for workers

Answer 34

increase employment due to greater production of goods

Question 35

Consequences of price floors for government (3)

Answer 35

opportunity cost - buy excess supply

cost money to store surplus

subsidise for export

Question 36

Consequences of price floors for other countries (4)

Answer 36

surplus exported at lower prices to maintain competition

other countries will dump in order to retain competition

lower prices will cause producers to lower production

misallocation of resources

Question 37

Purpose of minimum wage

Answer 37

guarantee adequate income to low-income workers (mostly unskilled)

Question 38

Demand for labour curve

Answer 38

shows QTY of labour firms willing/able to hire at each wage

Question 39

Supply of labour curve

Answer 39

shows QTY of labour workers supply at each wage

Question 40

Consequences of minimum wage (4)

Answer 40

creates labour surplus - unemployment

illegal workers (immigrants) at wages below min. wage

misallocation of labour resources - prevents equilibrium price of labour

misallocation of product market - increases firms production costs + reduces supply