Govt intervention
What are public goods, and why does the government need to provide them?
Public goods are non-excludable and non-rivalrous.The private sector won’t provide them due to the free-rider problem.
How does an indirect tax affect market equilibrium?
It shifts supply left, raising price and reducing quantity
Distinguish between income and wealth.
Income is a flow (e.g., wages), wealth is a stock (e.g., assets).
Evaluate the effectiveness of minimum wage laws.
Pros: Reduces poverty. Cons: May increase unemployment if set too high
What is a regressive tax?
A tax where lower-income earners pay a higher proportion of income (e.g., sales tax).
Why are merit goods under-consumed in a free market?
Consumers undervalue their long-term benefits.
Who bears the burden (incidence) of an indirect tax?
Depends on elasticity—consumers pay more if demand is inelastic.
What does the Gini coefficient measure?
Income inequality (0 = perfect equality, 1 = maximum inequality)
Why might indirect taxes be regressive?
They take a larger % of income from low earners (e.g., VAT on essentials).
What is a progressive tax?
A tax where the rate increases with income (e.g., income tax).
Why are demerit goods over-consumed?
Consumers ignore negative externalities.
How do subsidies affect producers and consumers?
They lower prices, increase quantity, and encourage production
Why do market economies create income inequality?
Differences in skills, education, inheritance, and market power.
How do inheritance taxes reduce wealth inequality?
They limit wealth concentration across generations.
What is the difference between specific and ad valorem taxes?
Specific tax is a fixed amount per unit , while ad valorem is a percentage of price
What is the purpose of a maximum price？
To make essential goods affordable,but may cause shortages.
What is a buffer stock scheme?
Government buys surplus in good harvests and sells in shortages to stabilize prices
How does a progressive tax reduce inequality?
Higher earners pay a larger % of income
What are the drawbacks of buffer stock schemes?
High storage costs and risk of mismanagement.
What type of tax is cooperation tax belongs to?
Direct tax.
What is the purpose of a minimum price？
To ensure producers earn enough,but may cause surpluses.
Why might government-provided information correct market failure?
It reduces information asymmetry
What are transfer payments?
Government payments to redistribute income (e.g., unemployment benefits).
Why might state-provided healthcare improve equity?
Ensures access regardless of income (e.g., NHS in the UK).
Criticize the use of Gini coefficient as a sole measure of inequality.
Ignores wealth distribution, regional differences, and non-monetary factors.