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Summary AS Level Notes Economics Unit 1 Government Intervention
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AS Level Notes Economics Unit 1 Government Intervention Revision Notes
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Government intervention is when government intervenes with the market to solve marketfailuex tax regulation subsidies
Indirect tax tax on spending can be passed into third parties ex VAT120 excessdutie
Direct tax put on person paying tax can not be passed into third parties
ex incometax
Types of indirect taxi corporationto
Specific tax Ad Valorem tax
flat rate tax on any product tax set as a percentage of the
of any kind original price 9price 9 tax
ex 2.05 tax on any alcohol eg VAT sales tax
expensive and cheap
price
Price n S2
by S2 s foaniglunkfrs sa
paid
consumers
n
p P2 f
n
valueofthe tax per unit pg 4141114 I
GP2
P tI 1
i l a
n paidby a
papidodfilers i
D producers D
i
i l
g s
QQ Quantity S2 si Quant t
e e
pay more tax than pay more tax than
Consumers Producers
producers since PED PES consumers since PESCPED
Putting tax when
PED is high government will gain lower tax revenue discourage more people
PED is low government will gain higher tax revenue discourage less people
Progressive tax marginal rate of tax rises as incomes rise
Proportional tax marginal rate of tax is constant same tax rockto everyone
Regressive taxes marginal rate of tax falls as incomes rise ex VAT
Vertical equity method of collecting tax in which higher income earners
should pay more tax Who are able to pay more tax
should contribute more than those who can't
Fiscal drags In a progressive tax system as wages rise more income is paid as tax DAD
Marginal rateof tax amount of tax paid of additional income
9progressive taxes 9 marginal taxes
Income Tax Direct tax ex incomeprofitswealth To increase income
of consumers
9AgeTax Increase progressive nature of a tax
yo I first40,000youpaynotax Introduce more bands at higher income
Bpays100 in tax Increasingtaxes for higherincome earners
B Ii i A pays 4400 in tax 0 10K pay 0 10K 34.5kpay 20
i l C pays 14700 intax 34.5k 60K pay 40 60K 150kpay 45
I
i rl i Increase income at which no tax
Oeoooo nooosoo woofncome
is payed 9 allowance
Hence income tax is a progressive tax Reduce tax rule ex 20 18
, VAT Indirect tax ex spending on goodslservices
AgeTok
obtain
taller
20 Hypothecated tax
t
toxcasrefontortgiepgarticular purpose
Income income
Subsidy by costofproductio
payments given by government to producers in order to encourage more output
and or investment This means that business will be more productive allowing them
I to lower their price to encourage consumption Thisgoods
may have positive external
benefits to third parties eg dental care
however if PED inelastic towering price will not have
Price
big
effect on consumption price s
oducer G s
senetit Sz Pi
p i
trial I
da Advantages
toO
consumer De of subsidy a.az
s
Quantity
benefit Consumers benefit from lower prices
on Q2 Quantity Good which is subsidised may have external benefits
ex encourage to drink juice instead of color dueto dprices
Disadvantages of subsidy
There is an opportunity cost
ofgiving a subsidy
ex government could provide more merit goods
Government
may haveto raise taxes to be able to
provide subsidies
Danger of a subsidy is that business may become
dependent on it and then opperate inefficiently They
do not have the incentive to keep their production
costs low
Business may misuse thesubsidy and rather than
invest in new machinery and lower prices
ex business could pay their directors higher wages
Effectiveness of the subsidy will depend on it's size
Effectiveness of the subsidy will depend on it's PED
Minimum Prices
Forsome goods as agricultural goods prices are volatile and the government may
intervene to set a minimum price Purpose is to provide farmers with a more stable
income which helpsthem to plan investment in new machinery Often businesses
have to borrow from the bank and then repay the debt each month so they
need to know if they have enough income
Minimum price is above equilibrium
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