Topic 11 - Government Policy

Question 1

A tax placed on a relatively elastic good hurts producers more than the same tax placed on a relatively inelastic good

Answer 1

(i) Because the elastic producer earns less per unit (since they swallow a greater proportion of the tax).
(ii) Because the traded quantity decreases by a greater amount.

Question 2

Minimum wage advantages

Answer 2

Generally protects low skilled workers.
– Workers are guaranteed a certain wage for their labour.
– Some workers get higher wages than they might have otherwise, especially in monopsony markets, this may result in efficiency wages and improved productivity.
– Firms may shift from labour intensive production to capital intensive production which may improve productivity.
– May help the people who need it the most.

Question 3

Minimum wage disadvantages

Answer 3

Higher levels of unemployment which causes a cost to government.
– Higher costs to business for labour. This may reduce demand if the firm increases their price.
– Generally effects low skilled workers the most, which is costly (e.g. retraining) if they cannot find other jobs.

Question 4

Tariff advantages

Answer 4

Firms get a higher price so have increased profits.

• The government gets revenue from the tariff payment

Question 5

Infant industry

Answer 5

industries that are not yet fully developed need protection to allow them to grow and develop in the short run (i.e. they can use economies of scale to reduce costs in the long run) whilst not having to compete with cheap imports.

Question 6

Dynamic potential

Answer 6

countries may recognise areas of growth in certain sectors and introduce tariffs to incentivise firms into that market. I.e. a tariff on software to develop the Australian software industry.

Question 7

Self-sufficiency

Answer 7

Tariffs maintain the domestic industry.
• To protect domestic jobs.
• To preserve traditional industries (the destruction of a local industry from cheap imports can have a negative short term
social impact).

Question 8

Tariff Disadvantages

Answer 8

Efficiency – tariffs create a Dead Weight Loss as consumer surplus falls and this is not fully recouped by firms.
• Tariffs allow inefficient firms to operate.
• Retaliation - protective policies of one country are often followed by protective policies by another (i.e. a tariff war) which hurts a countries ability to export. In the end, everyone loses.