Theme 1.4.1 Government intervention in market (unit 20)

Question 1

Why do governments intervene in markets?

Answer 1

They often intervene to correct market failure. They do this to increase total welfare which happens if any costs are incurred are less are less than the benefits gained.

Question 2

Why don’t indirect taxes work?

Answer 2

• They may be to difficult to implement so that they can’t be dodged and it may to be large or small.
• Governments may also do it to raise tax receipts and not only to correct market failures.
• They are very unpopular and may lead to civil unrest.

Question 3

Why may subsidies not work?

Answer 3

• They may be to difficult to implement so that they can’t be dodged and it may to be large or small.
• There may be conflict with other party aims so may not be introduced for political reason.
• They can be difficult to remove because a market can become reliant upon them.
• It can also just lead to inflation if the market is large enough.

Question 4

Are maximum prices good?

Answer 4

It may improve standard of living because if implemented of necessities it means poorer people will be able to afford the product now. It could however lead to excess demand market as less can be supplied now.

It can also lead to black markets emerging.

It can also result in the quality of a product increasing.

Question 5

Are minimum prices good?

Answer 5

It can reduce the consumption go goods with negative externalities such as tobacco. however it can lead to excess supply of a good.

Question 6

Why is regulation used?

Answer 6

It can be used to close information gaps to reduce market failure. they are also simple to understand but can be hard to police and costly to do so.