Theme 1: Government Intervention

Question 1

Advantages of Indirect taxation

Answer 1

-internal externality social welfare is maximised
-raises goverment revenue, helps good to become elastic in the long run

Question 2

Disadvantages of indirect taxation

Answer 2

-difficult to know the size of the externality so it is difficult to target the tax
-there could be conflict between the government goals
-black market
-depends of PED

Question 3

Advantages of subsidies

Answer 3

-social optimum output and welfare is maximised
-positive externalities

Question 4

Disadvantages of subsidies

Answer 4

-high opportunity cost
-as with taxes difficult to target
-subsidies can cause producers to become inefficient
-one introduced subsidies difficult to remove

Question 5

Advantages of limit pricing

Answer 5

-allow for consideration of externalities help increase social welfare
-maximum price ensures that goods are affordable and producers get a fair price

Question 6

Disadvantages of limit pricing

Answer 6

-there is a distortion of price signals and this causes excess supply/demand
-difficult to know where to set prices
-both can lead to the creation of black markets

Question 7

Buffer stock scheme

Answer 7

Maximum and minimum price schemes implemented at the same time
Prevents price fluctuation and provides market stability
Causes inefficiency and places a large cost on the government

Question 8

Trade pollution permits advantages

Answer 8

-singer the government caps the number of permits guaranteed pollution will fall
-raise revenue by selling permits
-encourages companies to use and invest green technology
-encourage efficiency

Question 9

Trade pollution permits disadvantage

Answer 9

-expensive to monitor and police
-raises cost for businesses
-difficult to know how many permits

Question 10

Advantages State provision of public goods

Answer 10

-this corrects market failure
-it can help to bring equality
-benefits of the goods themselves

Question 11

Disadvantages of state provision

Answer 11

-expensive high opp cost
-wrong combination of goods
-inefficient at production
-corruption and conflicting objectives

Question 12

Provision of information advantages

Answer 12

-this helps consumers act rationally
-used alongside other policies

Question 13

Provision of information disadvantages

Answer 13

-this can be expensive for the goverment opp cost
-consumers may not listen to the information

Question 14

Regulation disadvantages

Answer 14

-laws expensive
-less efficient method of reducing pollution
-regulatory capture
-firms may pass on costs
Excessive regulation

Question 15

Types of goverment failure

Answer 15

-distortion of price signals
-unintended consequences
-excessive administration costs