methods and effects of government intervention in markets chapter 13

Question 1

types of indirect tax

Answer 1

ad valorem tax and specific taxes

Question 2

ad valorem tax

Answer 2

taxes in proportion or percentage of the price charged by the retailer. like VAT or GST

Question 3

specific tax

Answer 3

in the form of a fixed amount per unit purchased. tax is based on measurable quantity. the final price includes tax

Question 4

why are indirect taxes used

Answer 4

Indirect taxes are widely used to discourage the production and consumption of demerit goods. These taxes tend to be passed on to consumers through increased prices in the market, although technically they are imposed on the producer.

Question 5

who should pay indirect tax

Answer 5

this tax must be paid to the government by retailers, wholesalers, manufacturers and other providers of taxable goods and services.

Question 6

impact of indirect tax on goods

Answer 6

a business requires a price that is higher than the original price by the amount of the tax. With a specific tax, this is represented by a shift to the left of the supply curve by the amount of the tax. the quantity is traded less

Question 7

incidence

Answer 7

the extent to which the tax burden is borne by the producer or the consumer or both

Question 8

how does price elasticity of demand affect tax

Answer 8

The extent to which the producer is able to pass on the tax by raising price depends on the price elasticity of demand for the product. The more price inelastic the demand, the easier it is for the seller to pass on the tax to the consumer in the form of higher prices.

Question 9

how does price inelastic demand affect tax

Answer 9

The more price inelastic the demand, the easier it is for the seller to pass on the tax to the consumer in the form of higher prices.

Question 10

how does price elastic demand affect tax

Answer 10

If demand is price elastic, then consumers will invariably buy less of the product as price rises, resulting in the producer having to absorb a greater part of the indirect tax.

Question 11

how does indirect taxes impact collection of tax

Answer 11

it is easier to collect indirect tax

Question 12

subsidiaries

Answer 12

direct payments made by the governments to the producers of goods and services

Question 13

some reasons for subsidiaries

Answer 13

to keep down the market prices of essential goods
to encourage greater consumption of merit goods
to raise producers income

Question 14

how does subsidiaries impact producers

Answer 14

it has the opposite effect of indirect tax- it is the equivalent of fall in costs for the producer. there will be a fall in price and increase in quantity traded

Question 15

how are subsidiaries shown in graphs

Answer 15

subsidiaries results in right ward shift in the market supply curve. a reduction in a subsidy payment shifts the supply curve to the left

Question 16

who shares the incidence of indirect taxes

Answer 16

When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax

Question 17

who shares the incidence of subsidy

Answer 17

the incidence of a subsidy is shared between consumers and producers. consumers benefit through lower price. producers benefit through receiving a higher price than they would selling an increased supply on the market

Question 18

disadvantages of subsidies

Answer 18

it interferes with the market mechanism.
it has implications for opportunity cost
subsidy payments usually come out of tax revenue where there will be other conflicting demands for funding

Question 19

problems of subsidy

Answer 19

Estimating the size of subsidy required is a further difficulty.
subsidies are ‘blanket’ or lump sum payments and, unlike taxes on consumers, cannot easily be linked to incomes and the ability to pay so high income and low income consumers pay the same amount per unit of what they consume.

Question 20

how to overcome problems of subsidy

Answer 20

it is necessary to assess who benefits from a particular subsidy

Question 21

how are free services provided by the government financed

Answer 21

financed through the tax system

Question 22

how do free services provided by the government lower equality

Answer 22

If these services are used equally by all citizens, then those on lowest incomes gain most as a percentage of their income

Question 23

how are goods and services provided by the government that do not make it free

Answer 23

A common model is for there to be part free provision, with other parts being paid for at the point of use.

Question 24

why do market failure not justify free provision to the consumer

Answer 24

The justification must be on the grounds of equity. The view is that everyone should have access to a certain level of healthcare and education regardless of income. This means that where these services are provided universally free, they are the same as universal benefits.

Question 25

characteristics of public goods

Answer 25

they will not be provided by the market mechanism. Neither will consumers be willing to pay for them.
provided directly by the government and paid for out of tax revenue.

Question 26

what are public goods frequently criticized for

Answer 26

it leads to inefficiency, with costs higher than what would have been the case in a competitive market.

Question 27

goods and services of different economies

Answer 27

There are major differences in the direct provision of goods and services between economies

Question 28

disadvantages with direct provision of goods and services

Answer 28

Resources are not allocated efficiently. If a charge is made or introduced, demand is likely to fall. It can also be argued that many consumers could afford to pay a charge, so reducing the tax burden or allowing the funding saved in this way to be put to alternative uses.

Question 29

direct provision of goods and services

Answer 29

measure used to correct market failures caused by public goods

Question 30

maximum price

Answer 30

a price that is fixed; the market price must not exceed this price; sometimes called price ceiling

Question 31

what can prompt the government to pass legislation to impose a maximum price

Answer 31

Market failure can occur where the price of a good in the free market is too high.

Question 32

how does maximum price help

Answer 32

This is seen as a way of assisting families on low incomes, reducing inequalities in income or in recognition that the wider benefits of consuming a particular product are not fully appreciated.

Question 33

where are maximum price controls valid

Answer 33

in markets where the maximum price imposed is below the normal equilibrium price as determined in a free market. This means that the price that can be legally charged by sellers must not be any higher.

Question 34

problem with maximum prices

Answer 34

as the price cannot rise, the available supply has to be allocated in some other way.

Question 35

ways of restricting demand

Answer 35

queuing and rationing

Question 36

problem with rationing

Answer 36

leads to an informal or underground market for the products involved, with consumers then having to pay inflated prices well above the maximum price. Such markets inevitably arise when there are dissatisfied people who have not been able to buy the goods they want because not enough has been produced.

Question 37

minimum price

Answer 37

a price that is fixed; the market price must not go below this price; sometimes called a price floor. not common as those where maximum price control is imposed

Question 38

why governments may impose minimum price control

Answer 38

Controls are only valid in markets where the minimum price is set above the normal equilibrium price.

Question 39

examples of minimum price control

Answer 39

wages in certain occupations, usually low skilled, to avoid employers exploiting their employees
certain types of imported goods where close substitutes produced by domestic producers are available.

Question 40

effect at minimum price

Answer 40

suppliers are willing to supply considerably more products demanded by consumers. a lower quantity is traded than would have occurred at the equilibrium price

Question 41

disadvantages of minimum price

Answer 41

that producers are likely to be inefficient; firms with high costs have little incentive to reduce costs since the high minimum price protects them from lower cost competitors.
there is a danger that an informal market will develop,
The high rate of indirect taxation and high minimum price mean these products are attractive for non-market trading.
Consumers will be more than happy to buy from dealers offering these goods at less than the regulated minimum price.

Question 42

buffer stock scheme

Answer 42

a type of commodity agreement designed to limit price fluctuations

Question 43

how do buffer stock scheme work

Answer 43

smooth price rises and falls by buying and selling stocks of products depending on market conditions. buffer stock schemes combine the principles of minimum and maximum price controls.

Question 44

buffer stock scheme at minimum price

Answer 44

starts by setting a minimum price for a particular product. If the market price looks like going below this minimum, the buffer stock scheme will buy up stocks. These will be stored in warehouses. This action should raise the price since supply in the market has fallen.

Question 45

buffer stock scheme at maximum price

Answer 45

The effect will be to increase supplies which in time will see a reduction in the price of the product.

Question 46

why should the government use information provision as a form of direct intervention

Answer 46

information failure can result in the under consumption of merit goods and the over consumption of demerit goods

Question 47

examples of information provision as a form of direct intervention

Answer 47

public health announcements and campaigns
nutrition and allergy information on food packaging.
compulsory information on cigarette packets warning of the dangers of smoking