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Flashcards in 1.3 Government Intervention Deck (29)
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What is an indirect tax?

A government levy on the sale of certain goods and services.


What is a specific tax?

Imposes a fixed amount of tax on each product.


What is an ad valorem?

Imposes a percentage tax on the value of a good or service.


What are taxes?

Levies imposed by the government thereby limiting the output of certain goods and services and raising the price of goods and services paid by consumers.


What do specific taxes do to the supply curve?

Cause a parallel shift to the left.


What do ad valorem taxes do to the supply curve?

Pivot the supply curve.


When will the government intervene?

If the price mechanism fails to establish the socially optimum equilibrium.


Why are indirect taxes good?

They are a major source of government revenue, they can be used to correct market failures, can be used to affect the level of AD, used to protect domestic firms from overseas rivals by imposing tariffs on imports.


Why do consumers miss out from the implementation of taxes?

As they have to pay higher prices epically if the demand is price inelastic.


Why do producers miss out from the implementation of taxes?

As their costs of production increases however if PED is low then they are able to pass most of the tax onto customers without largely affecting the level of demand.


What does the tax create?

Welfare loss.


What is a subsidy?

Financial assistance from the government to encourage output, to reduce the price of certain merit goods or to keep down the cost of living.


What do subsidises do to the supply curve?

Shift it to the right.


Why are subsidies given to producers?

To entourage the output of merit goods, to limit negative externalities and to protect certain industries and to prevent a subsequent decline in unemployment.


How do consumers benefit from a subsidy?

The market price is lowered so more people are willing and able to buy the good or service.


How do producers benefit from a subsidy?

their production costs are reduced which helps to improve their competitiveness and profitability.


Why may subsidies be an issue for the government?

The government spends money on financing the subsidy and there is an opportunity cost in doing so but the net benefits to society may outweigh the costs.


Why may subsidies be bad for the market?

They distort market forces and mat subsequently protect inefficient firms.


What is a price ceiling?

A maximum price when the government sets a price below the market equilibrium price to encourage output and consumption.


Why are price ceilings used?

To protect consumers from soaring prices.


What happens to consumer and producer surplus after the maximum price has been imposed?

Consumer surplus is increased but producer surplus is reduced.


How do consumers benefit form the price ceiling?

Since the price is lower.


Why do price ceilings create a deadweight loss?

They distort market forces and therefore can result in an inefficient allocation of scare resources.


What can the excess demand caused by the price ceiling cause?

Non price rationing mechanism such as queuing, ration coupons and most favoured customers. Can also cause parallel markets to appear due to the shortages in supply.


What is a price floor?

A minimum price set above the market equilibrium price to encourage the supply of a certain good or service.


What issue does a price floor occur?

Excess supply since the supply outweighs demand when prices are so high.


Why do producers benefit from price floors?

It guarantees a higher price than before - this also applies in the labour market when more workers supply their labour services if there is a minimum wage.


Why do price floors cause a deadweight loss?

There is a misallocation of resources.


Why do consumers lose out with a price floor?

They pay higher prices when they are imposed.