Edexcel A Level Economics -
Government Intervention - 1.4.1-2 Exam
2024 Questions and Answers
What is an indirect tax? - Answer>>A tax on expenditure
How does the imposition of indirect tax by the government
prevent market failure? - Answer>>- Imposing an indirect tax in
the form of e.g. VAT, will disincentives the consumption and
output/supply of a negative externality, as it will raise costs for
consumers. This will result in the supply curve shifting left It is
shown on the graph where MSB = MSC
What are the advantages of the government imposing an indirect
tax? - Answer>>- It raises government revenue, which the
government can use to solve the externality via education or
compensate on those affected by the pollution
- Few administrative costs are involved
- Externality is internalised and social welfare is reached
- Incentive to reduce pollution
, Evaluation of imposing indirect taxes? - Answer>>- Difficult to
gauge the size of the externality and is thus hard to target. The
effect depends on where the tax is set and governments suffer
from imperfect information when setting tax
- Could lead to creation of black market
- Ineffective in reducing pollution if demand is price inelastic, so
might require a large tax to have any effect
- Indirect taxes are regressive, and could worsen inequality
- Any unintended consequences of setting the tax?
- How is the revenue from the tax used?
- What is the impact on businesses/competitiveness: capital
investments, negatively affect trade?
What is a subsidy? - Answer>>a sum of money granted by the
government or a public body to assist an industry or business so
that the price of a commodity or service may remain low or
competitive.
How do subsidies prevent market failure? - Answer>>A subsidy
is used in the case positive externalities and information gaps. As
a result of a subsidy, the product or service can be supplied at a
lower price which results in supply shifting to the right. As a result
production at a socially optimum level is encouraged at the level
of . MSC = MSB
What the advantages of the government granting subsidies? -
Answer>>- Might help to reduce inequality
- Incentive for people to increase consumption
- reduction in cost of production enabling suppliers to reduce the
price
- society reaches social optimum output and welfare is maximised
Evaluation of the government granting subsidies? - Answer>>-
Large opportunity cost involved, huge sum of money is involved
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