Governement intervention

• How does the price elasticity of demand affect the amount of tax passed on to consumers?

  If demand is price inelastic, most or all of the extra cost is likely passed on to the consumer.
• What happens when demand for a good is price elastic regarding tax costs?

  The producer is much more likely to take on most of the extra cost.
• What do the purple and blue boxes represent in the context of tax?

  • Purple box: Consumer tax
  • Blue box: Producer tax
• What are the advantages and disadvantages of internalizing the cost of negative externalities in the price of a good?

  Advantages:

  • Reduces demand for the good
  • Lowers the level of production
  • Mitigates effects of negative externalities

  
  

  Disadvantages:

  • Difficult to assign a monetary value to negative externalities
• What is a potential benefit of tax revenue from goods with negative externalities?

  The revenue can be used by the government to offset the externalities, such as funding services to help people stop smoking.
• What happens to demand for goods with price inelastic demand when a tax is imposed?

  The demand is not reduced by the extra cost of the tax.
• How do indirect taxes affect a product's international competitiveness?

  Indirect taxes usually increase the cost of production, reducing international competitiveness.
• What was the aim of the Common Agricultural Policy (CAP)?

  • To help farmers
  • To correct market failure caused by fluctuating prices for agricultural products
  • To provide farmers with a stable income
• What methods were used to achieve the aims of the Common Agricultural Policy?

  Buffer stock and subsidies were used.
• What is buffer stock in the context of agricultural policy?

  Buffer stock is a reserve of extra inventory held to prevent stock from running out.
• What is a subsidy in the context of the Common Agricultural Policy?

  A subsidy is a grant given to farmers by the government to keep prices stable.
• What was a negative outcome of the Common Agricultural Policy?

  The CAP resulted in distortions of the agricultural market, encouraging oversupplying and misallocation of resources.
• What was the net effect of the Common Agricultural Policy on society?

  It led to a net welfare loss for society due to high opportunity costs.
• What is the difference between nominal GDP and real GDP?

  Nominal GDP is without inflation included, while real GDP includes inflation.
• Why is nominal GDP typically a higher percentage than real GDP?

  Because nominal GDP does not account for inflation.