Section E

Question 1

Indirect Tax

Answer 1

A tax levied on expenditure on goods and services

Question 2

Incidence of a tax

Answer 2

The way in which the burden of paying a sales tax is divided between buyers and sellers.

Question 3

Polluter pays principle

Answer 3

Any measure whereby the polluter pays explicitly for pollution caused

Question 4

Progressive tax

Answer 4

A tax that takes a higher percentage from rich

Question 5

Regressive tax

Answer 5

Tax that takes higher percentage from the poor

Question 6

Examples of indirect tax

Answer 6

Vat
duties on alcohol
Tax on fuel
Green tax

Question 7

Aim if indirect tax

Answer 7

To use the price mechanism to reduce overproduction or demerit goods with negative externalities or to raise tax revenue

Question 8

Indirect tax key steps:

Answer 8

1) Govt adds indirect tax to good
2) similar effect to increase in production costs
3) supply decreases
4) price raises
5) QD contracts
6) Quantity closer to QSO
7) OC reduced
8) less misallocation of resources
9) less MF

Question 9

Indirect tax evaluation points:

Answer 9

1) difficulties in setting correct size of tax
2) PED (inelastic PED may mean consumption is not effective)
3) tax may be avoided (black market)
4) will not reduce negative externalities globally
5) other factors (rising income or rising price of substitute)
6) cost of putting it in place
7) info provision may work better

Question 10

Subsidy:

Answer 10

A grant given by the govt to producer to encourage the production of a good or service

Aim:
To use price mechanism to encourage production and consumption or merit goods/ goods with positive externalities

Question 11

Subsidy key steps:

Answer 11

1) Govt adds subsidy
2) similar effect to decrease in production costs
3) supply increases
4) price drops
5) QD extents
6) Quantity closer to QSO
7) UC reduced
8) less misallocation of resources
9) less MF

Question 12

Prohibitation

Answer 12

An attempt to prevent the consumption of a demerit good by declaring its illegal

Question 13

Prohibition Evaluation

Answer 13

• penalty needs to be correct
• practicalities of enforcing (opp cost)
• avoided by black markets
• Time lag
• poss govt failure

Question 14

Regulation

Answer 14

A rule set down by the Govt that firms/ consumers need to operate within
E.g:
Limits,bans,prohibition,max/min price

Aim:
To reduce market failure for goods with positive/ negative externalities

Question 15

Regulation key steps

Answer 15

1) what are the details of the reg? Should focus on changing behaviour
2) is the reg requiring action by consumers or producers
3) what is the penalty if they dont comply?
4) apply to practical problem
5) follow through with steps to reduce MF
6) is there a diagram showing shift in d/s that might help

Question 16

Pollution Permit

Answer 16

A permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter

Aim:
To reduce MF by reducing negative externalities through market based system

Question 17

Pollution permit key steps

Answer 17

• govt sets number of tradeable permits
• firms buy permits
• they can now only pollute a certain amount
• there is a penalty of a fine
• govt controls total pollution
• over time, level of pollution can be reduces by giving less permits
• negative externalities reduced
• op/oc reduced
• closer to QSO
• AE increases
• MF reduced

Question 18

Pollution permits evaluation

Answer 18

• setting right level of permits
• setting right fine
• cost and impracticalities of enforcing (opp cost)
• time lag
• unfair advantage for larger firms
• need global strategy

Question 19

Max and Min prices

Answer 19

Aim:
Encourage consumption by making more affordable and vice versa

Max Prices e.gs
-football, housing, food
Problems: opp cost if govt subsidise, back market, shortages

Min Prices eg.s
-alcohol, labour
Problems:surplus stock, opp cost for govt if they buy surplus stock, standard of living down, harmful goods have inelastic ped

Question 20

Info Failure=

Answer 20

A lack of information resulting in consumers and producers making decisions that do maximise welfare

Question 21

Info Provision

Answer 21

Govt delivery of consumers to consumers/ producers so that they are aware of full social bens/ cost of good.

Aim:

1) shift d curve closer to QSO
2) provide info about negative externalities so consumers/ producers can make informed economic decisions

Question 22

Info Provision key steps

Answer 22

• Govt provides info
• consumers were previously unaware of full extent of harm to themselves and society so were over consuming
• can now make fully informed economic decisions and change behaviour
• D shifts left
• QD closer to QSO
• misallocation down
• AE up
• MF down

Question 23

Info Provision Eval

Answer 23

• difficult to communicate info
• responsiveness of consumers
• time

Question 24

Direct Provison

Answer 24

Govt intervenes in a market system and provides the good/ service to consumers funded by tax rev
E.g
-Defence, Education, Health

Question 25

Direct provision key steps:

Answer 25

• govt decides good has significant importance to consumer
• However, if left to free market it has public good characteristics and due to lack of profit would be under produced
• govt pays by tax rev
• consumers can use the good for free or at a lower price
• consumption goes up
• closer to QSO
• AE up
• MF reduced

Question 26

Direct provision evaluation

Answer 26

For:

• left to free market, would not be sufficient
• Fairness- human right
• govt expertise
• access to info

Against:

• OC because its free
• OP (difficult to find QSO)
• Opp cost of spending
• Private sector mire efficient with profit incentives (govt could possibly provide some and use private to help alleviate their back logs)

Question 27

Govt Failure

Answer 27

Misallocation of resources arising from govt intervention, that causes a divergence between MSB and MSC

(Tries to intervene and makes it more inefficient)

Question 28

Causes of Govt Failure

Answer 28

-decisions made in political interest
-short termism may not take into account long term considerations
-costs of intervention
-law of unintended consequences
- distortion of price signals leading to surplus and shortages.
E.g- patio heaters in northern ireland.