Micro Theme 1 : 4

Question 1

Adv of indirect tax

Answer 1

-internalise externality : social welfare maximised
-raise gov revenue : can be used on other externality such as education

Question 2

DisAdv of indirect tax

Answer 2

-difficult to know size of externality due to imperfect info
-conflict in between the gov to increase revenue and solving externality
-inelastic demand : tax ineffective at reducing production
-Black Market
-taxes are political unpopular
-regressive : poor spend larger % of income on indirect tax then poor

Question 3

Examples of indirect tax

Answer 3

Landfill taxes, fuel duties, alcohol duties, tobacco duties, air passenger duties and sugar taxes

Question 4

Adv of Subsidies (solves positive externality in consumption)

Answer 4

-SOL and social welfare maximised
-can encourage small businesses bringing equality and exports

Question 5

DisAdv of subsidies

Answer 5

-Gov spend a lot of money : Opportunity cost
-they are difficult to target as size of externality is unknown
-subsidies causes inefficiency as firms become reliant to gov
-once implemented, difficult to remove

Question 6

Max/min price adv

Answer 6

Can be placed on the SOL MSB=MSC
to help increase social welfare
-max price helps make goods affordable, whilst minimum ensures producers get a fair price. Can reduce poverty and increase equality

Question 7

Max/min price DisAdv

Answer 7

Distortion of price signals, excess supply/demand
-difficult for gov to know where to set the price as itll be difficult to know the size of externality and the affects on excess supply and demand
-both can lead to black markets
And bribes and also discriminatory policies in allocating goods

Question 8

Examples of max and min prices

Answer 8

Manhattan maximum prices for rent control
Venezuela black market creation as there’s price caps on milk, toilet paper, medcine (no profit at low prices )
Scotland : minimum price on alcohol, however poverty people who are addicted will become poorer

Question 9

Adv of tradable pollution permits

Answer 9

Government control number of permits, control supply so increase social welfare
-government incrsss revenue by selling permits and fining firms
-encourages investment in green technology
-firms can make decision whether to cut pollution or buy permits. Helps encourage efficiency

Question 10

Dis of tradable pollution permits

Answer 10

-expensive to monitor and control, only work if monitored properly, impose fine large enough
-raise cost for business, will pass onto consumers
-difficult to know how many permits the government should allow

Question 11

US trading sulphur scheme

Answer 11

Reduced sulphur dioxide by 40%

Question 12

The EU Emission trading scheme 2005

Answer 12

21% reduction in green house gases

Question 13

State provison of public goods adv

Answer 13

-corrects market failure : provides important goods like street lights which increase social welfare
-incrsss equality as it ensures everyone has access to basic goods
-benefits of the goods itself : NHS
-government can ensure efficiency : develop !

Question 14

State provision of public goods disadvantage

Answer 14

-expensive : opportunity cost + administrative costs
-since market is not invoked, government may produce wrong combination of goods, no price signals
-government may be inefficient as they are not incentivised to cut cost
-corruption !

Question 15

Provison of information

Answer 15

-consumers act rationally
-using policies make demand more elastic in LR is helps indirect taxes to become more effective at reducing output

Question 16

Provison of information disadvantages e

Answer 16

Can be expensive for government
-government don’t allows have. All the info
-consumers may not listen to the info due to irrational behaviour

Question 17

Adv of regulation

Answer 17

• allow for MSB=MSC.. considers externalities, prevent exploitation of consumers, force to provide info to consume, help overcome market failure and maximise SW

Question 18

Disadv of regulation

Answer 18

-Laws may be expensive
-regulation less efficient than tradable pollution permits as mkre cost
-firms pass cost onto consumers
-excess regulation may reduce competition and efficiency, increasing bureaucracy and reduce innovation

Question 19

Examples of regulations

Answer 19

EU fishing quotas, smoking bans, minimum age laws,maximum vehicle CO2 emissions

Question 20

Causes of government market failure

Answer 20

Unintended consequences:
-excessive administration costs : social cost greater than social benefit
-information gaps

Question 21

Examples of positive externality of consumption

Answer 21

-Good architecture. Choosing a beautiful design for a building will give benefits to everybody in society.
-Consuming a healthy diet ultimately will benefit others in society because less health care costs, higher productivity
-Education or learning new skills. With better education, you are more productive and can gain more skills. But, also the rest of society benefits from your new skills.

Question 22

Government policies to increase demand for goods with positive externalities

Answer 22

Rules and regulations – minimum school leaving age
Increasing supply – the government building of council housing to increase the stock of good quality housing.
Subsidy to reduce price and encourage consumption, e.g. government subsidy for rural train services.