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Questions and Answers
Which of the following is NOT a disadvantage of government intervention?
Which of the following is NOT a disadvantage of government intervention?
Indirect taxes, like the sugar tax in the UK, are aimed at reducing consumption of unhealthy products.
Indirect taxes, like the sugar tax in the UK, are aimed at reducing consumption of unhealthy products.
True (A)
What is one example of a public good mentioned in the content?
What is one example of a public good mentioned in the content?
Vaccination programs during COVID-19
The __________ of government intervention refers to incorrect allocation of resources.
The __________ of government intervention refers to incorrect allocation of resources.
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Match the following government interventions with their examples:
Match the following government interventions with their examples:
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What is one reason for government intervention in the market?
What is one reason for government intervention in the market?
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Indirect taxes can be used to discourage consumption of harmful goods.
Indirect taxes can be used to discourage consumption of harmful goods.
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What is the effect of a price ceiling?
What is the effect of a price ceiling?
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A government subsidy aims to reduce ______ costs for producers.
A government subsidy aims to reduce ______ costs for producers.
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Match the type of government intervention with its purpose:
Match the type of government intervention with its purpose:
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What is a potential drawback of implementing subsidies?
What is a potential drawback of implementing subsidies?
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Price floors can lead to surpluses in the labor market.
Price floors can lead to surpluses in the labor market.
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What does regulation aim to control?
What does regulation aim to control?
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Study Notes
Government Intervention in Economics
- Government intervention aims to correct market failures, improve equity, stabilize the economy, and enhance efficiency.
Reasons for Government Intervention
- Market Failure: Governments intervene to address inefficiencies caused by externalities, public goods, merits/demerits.
- Equity: To promote fair distribution of income and wealth.
- Stabilization: To control inflation and unemployment.
- Efficiency: To allocate resources effectively when market forces fail.
Types of Government Intervention
Indirect Taxes
- Definition: Taxes levied on goods and services (e.g., VAT, excise tax).
- Purpose: Address negative externalities, discourage harmful consumption.
- Impact: Shift the supply curve to the left.
- Advantages: Reduces harmful consumption, generates revenue.
- Disadvantages: Regressive impact, potential for black markets.
Subsidies
- Definition: Financial support to firms or consumers.
- Purpose: Encourage positive externalities, lower production costs.
- Impact: Shift the supply curve to the right.
- Advantages: Promotes beneficial activities, supports low-income groups.
- Disadvantages: Opportunity costs, potential overproduction.
Price Controls
-
Price Ceilings:
- Definition: Maximum price set below equilibrium.
- Impact: Creates shortages, often leads to black markets.
- Example: Rent controls.
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Price Floors:
- Definition: Minimum price set above equilibrium.
- Impact: Leads to surpluses and unemployment (labor market).
- Example: Minimum wage.
- General Impact of Price Controls: While potentially achieving equity, these often introduce inefficiencies in the market.
Regulation
- Definition: Rules to control economic behavior.
- Purpose: Reduce negative externalities, improve societal welfare.
- Advantages: Reduces externalities, improves societal welfare.
- Disadvantages: High enforcement costs, possibility of evasion.
Tradeable Permits
- Definition: Permits for pollution up to a limit; permits can be traded.
- Example: Carbon markets.
- Advantages: Encourages efficient pollution control.
- Disadvantages: Difficult to set appropriate limits.
Public Goods Provision
- Definition: Government directly provides non-excludable, non-rivalrous goods.
- Example: Street lights.
- Analysis: Corrects under-provision, but could be inefficient.
Direct Provision of Services
- Examples: Education, healthcare; addressing equity concerns.
- Advantages: Reduces inequality, can address issues of accessibility.
- Disadvantages: High cost, potential inefficiencies.
Real-World Examples
- Indirect Taxes: UK sugar tax (harmful consumption).
- Subsidies: Renewable energy incentives.
- Price Ceilings: Rent controls.
- Price Floors: Minimum wage.
- Regulation: EU plastic bans.
- Public Goods: Vaccination programs.
Evaluating Government Intervention
- Advantages: Correct market failures, promote equity, stabilize the economy.
- Disadvantages: Potential for government failure, high opportunity costs, market distortion, corruption.
- Evaluation Criteria: Magnitude of market failure, short/long-term impacts, effectiveness/enforcement, unintended consequences.
Tips for DP1 Economics Paper 1 Answers
Part (a) (Definition and Explanation)
- Define key terms like "indirect taxes," "market failure."
- Use diagrams & explain shifts in supply/demand, curves.
- Relate the intervention to its objective (e.g., correcting externalities).
Part (b) (Evaluation)
- Analyze the impacts on different groups (consumers, producers, government).
- Discuss pros & cons with examples.
- Employ evaluation criteria (efficiency, equity, sustainability).
- Conclude with a balanced judgment.
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Description
This quiz explores the key reasons and types of government intervention in the economy. It covers concepts such as market failure, equity, stabilization, and efficiency, along with indirect taxes and subsidies. Test your understanding of how these interventions impact the economy and address market shortcomings.
