Unit 2 - 6

Question 1

What are cures for externalities?

Answer 1

1. Limits on pollution, congestion charging - prevents over production
2. Subsidies and legislations - prevents under providing

Question 2

Why can public goods be provided?

Answer 2

No business would want to provide them in a mixed economy because there is the “free-rider” problem, consumers could consume without paying and therefore producers would not receive sufficient income to cover their costs

Question 3

What is the cure for public goods being under provided in mixed economy?

Answer 3

The government provides them, raising the revenue from taxation

Question 4

Why would merit goods be underpovided without the government?

Answer 4

Would only be provided to those who could pay the full economic price

Question 5

what are the governments microeconomic objectives?

Answer 5

1. To prevent market failure
2. To distribute income and wealth evenly
3. To reduce regional disparities

Question 6

What are the governments macroeconomic objectives?

Answer 6

1. To achieve economic growth
2. To achieve low and stable inflation
3. To reduce unemployment
4. To keep the account of the BoP in balance

Question 7

What are the types of inequalities that can arise?

Answer 7

1. Income

2. Wealth

Question 8

What policies can be introduced to reduce inequalities?

Answer 8

1. National minimum wage
2. More job training
3. More progressive taxing
4. Providing more merit goods

Question 9

What are the advantages of direct tax?

Answer 9

1. The amount collected can be estimated with reasonable accuracy
2. They are progressive therefore will redistribute income and wealth
3. Takes account of people’s ability to pay

Question 10

What are the disadvantages of direct tax?

Answer 10

1. High rate therefore people try to evade, revenue decreases and increased costs of catching evaders
2. Less incentive to work if the rate is high
3. Enterprise is low if high tax on company profits

Question 11

What are the advantages of indirect tax?

Answer 11

1. Cheap to collect as burden of collecting lies with wholesalers, retailers and manufacturers
2. Wider tax base
3. Can be used to achieve specific goals
4. Adjustments to rates can be made much more easily than income tax

Question 12

What are the disadvantages of indirect tax?

Answer 12

1. Difficult to predict how many goods and services bought therefore uncertain revenue
2. Regressive - affect people with low incomes more heavily
3. Increase in prices which may contribute to inflation

Question 13

Why is unemployment measured?

Answer 13

1. Key indicator of the performance of an economy
2. Government needs to know the size of the problem before deciding on a policy to tackle it
3. Government needs to know areas suffering the most

Question 14

What are externalities?

Answer 14

Costs which are not paid by the producer and not included in the price charged to the consumer, incurred by others