microeconomics - government intervention (dd/ss)

Question 1

specific tax (indirect)

Answer 1

a constant sum levied on each unit of the good sold

e.g. excise duty of $88 per litre in SG

decreases: supply

Question 2

ad valorem tax

Answer 2

a tax pegged at a certain percentage of the good

e.g. 9% gst

decreases: supply

Question 3

specific subsidy (indirect)

Answer 3

Indirect specific subsidies are transfers from the government to the producer for the provision of goods that are given per unit of the good produced.

Question 4

price floor

Answer 4

legally established minimum price set above the market equilibrium price to prevent prices from falling below a certain level

e.g. agriculture

Question 5

price ceiling

Answer 5

legally established maximum price set below the market equilibrium price to prevent prices from rising above a certain level

e.g. Kenya’s price ceiling on maize to keep it affordable for locals

Question 6

quota

Answer 6

is a limit on the quantity produced imposed by a government through
legislation that is set below the market equilibrium quantity.

Question 7

sunk cost fallacy

Answer 7

the tendency of consumers to continue investing in a product or service despite the fact that it is no longer economically rational to do so.

Question 8

loss aversion

Answer 8

the tendency of consumers to be more sensitive to losses
than gains

Question 9

salience bias

Answer 9

the tendency of consumers to pay more attention to information that is easily accessible or stands out.

Question 10

consumer surplus

Answer 10

the difference between the highest price that consumers are willing and able to pay for a good or service and price they
actually pay.

Question 11

producer surplus

Answer 11

the difference between the lowest price that producers are willing and able to sell a good or service for and the price they actually receive

Question 12

deadweight loss

Answer 12

a measure of the loss of economic efficiency when allocative efficiency is not achieved.

Question 13

framework for explaining indirect subsidies/taxes/quotas

Answer 13

1. definition
2. example
3. decrease/increase dd/ss + why
4. effect on graph + why
5. eq price? eq qty?

Question 14

framework for explaining price floor/price ceilings

Answer 14

1. definition
2. example
3. pre-implementation: free mkt eq price? eq qty? total revenue?
4. after implementation: effect on Qd and Qs
5. reason for this effect
6. shortage/surplus created + why
7. surplus/shortage remains + why
8. AE worsened + why

Question 15

unintended consequences of price ceilings

Answer 15

shortage, non-price rationing, black market, increased opp cost for govt, allocative inefficiency