L6 - Government Policies

Question 1

Why do Governments Intervene in Markets?

Answer 1

in an attempt to make society fairer

Question 2

What are Price Ceilings?

Answer 2

– Prices can be deemed to be ‘too high’ by government and policy makers
- A price ceiling prevents the price in the market from rising above a certain level
- A price ceiling has no effect if the level is above the equilibrium price
- A binding price ceiling lowers the market
price but it causes excess demand
- suppliers wont increase the price up to the equilibrium due to market forces bring equilibrium back down

Question 3

What are the problems with price ceilings?

Answer 3

• long queues are inefficient –> wastes buyers time
• excess demand - people may not be able to get the product
• discrimination according to seller bias –> product may not go to those that value it the most

Question 4

What is the issue with price ceilings in the long run?

Answer 4

The problem of excess demand is likely to increase in the long-run

• In this case the government can try to influence supply and demand
• e.g. a cap on benefits is likely to decrease the demand for housing in London –> wouldnt this make the poorer people of London even worse of though?
• e.g. building new houses will increase the supply of rental properties

Question 5

What is a price Floor?

Answer 5

Prices can be deemed to be ‘too low’ by governments and policymakers
A price floor prevents the price in the market from falling below a certain level
- A binding price floor raises the market price but it causes excess supply
- A price floor has no effect if the level is below the equilibrium price
- price floors could be set to stop predatory competition or social reasons e.g. excess consumption of alcohol

Question 6

What is the problems with Price Floors?

Answer 6

• poor disproportionately affected by higher prices
• reasonable drinkers have to pay higher prices because a few people abuse the substance
• sellers may not be able to sell everything they want at market price

Question 7

Who does minimum wage effect?

Answer 7

• Minimum wage legislation ensures people receive reasonable incomes
  It is commonly argued that the minimum wage causes unemployment –> Price Floor created excess supply of labour
• Minimum wage has no effect on the wage of high skilled workers –> inelastic where as low skilled workers are elastic
• The extent of unemployment depends
  upon the elasticity of demand and supply
• A binding minimum wage can also affect the product market It increases the costs for firms who demand low-skilled workers
• cause supply to shift left increasing the price

Question 8

What is Specific tax?

Answer 8

a tax which is a fixed amount per unit sold

• e.g. tax per litre of petrol
• This cause the supply line to shift up or down

Question 9

What is Ad valorem tax?

Answer 9

a tax which is a percentage of the price e.g. VAT

• this cause the Supply line to rotate
• this means that at higher prices there is is more of a tax due to there percentage being of a higher price

Question 10

What is the incidence of tax?

Answer 10

• the distribution of tax on buyers and sellers
• above the equilibrium line the tax is paid by the consumer
• below the equilibrium line the tax is paid by the supplier
• all the tax is taken by the government

Question 11

hoe is the incidence of tax effect by the elasticity of demand and supply?

Answer 11

• when demand is inelastic a higher burden falls on consumer
• when demand is elastic a higher burden falls on the supplier
• when supply is inelastic a higher burden falls on the supplier
• when supply is elastic a higher burden falls on the consumer
• this normal applies to ad valorem tax