1.4

• What is the purpose of indirect taxation when a good has a negative externality?

  To prevent market failure
• What effect does indirect taxation have on the supply curve?

  It causes a fall in supply and increases costs to the individual
• What happens to the equilibrium position after the introduction of indirect taxation?

  The equilibrium position shifts to where S2=MPB=MSB at P2Q2
• What does the introduction of indirect taxation achieve in terms of social welfare?

  It internalises the externality and maximises social welfare
• What are the advantages of indirect taxation?

  • Internalises the externality, leading to social equilibrium
  • Raises government revenue for addressing externalities
  • Potentially makes goods more elastic in the long run

  
• What are the disadvantages of indirect taxation?

  • Difficulty in determining the size of the externality
  • Conflict between revenue raising and solving externalities
  • Potential for black market creation
  • Ineffectiveness if demand is inelastic
  • Political unpopularity
  • Regressive nature affecting the poor more than the rich

  
• What are some examples of indirect taxes used for externalities in the UK?

  Landfill taxes, fuel duties, alcohol duties, tobacco duties, air passenger duties, and sugar taxes
• What is the purpose of subsidies introduced by the government?

  To solve positive externalities and fix information gaps
• How do subsidies affect the supply curve?

  They shift the supply curve to the right by lowering the cost of production
• What is the social optimum position when subsidies are introduced?

  Where MSC=MSB at P2Q2
• What are the advantages of subsidies?

  • Achieves social optimum output and maximises welfare
  • Encourages small businesses and promotes equality
  • Supports exports
• What are the disadvantages of subsidies?


  • High opportunity cost for the government
  • Difficulty in targeting the exact size of the externality
  • Potential inefficiency in producers
  • Difficulty in removing subsidies once introduced

  
• What are some examples of subsidies?


  Subsidies on biofuels, solar panels, apprenticeship schemes, wind farms, and rail industries
• What is the condition for a maximum price to be effective?

  It must be set below the current price equilibrium
• What is a minimum price and when is it set?

  A minimum price is a legally imposed price that cannot go below the current price equilibrium
• What is the effect of a maximum price on the market?


  It creates excess demand
• What is the effect of a minimum price on the market?

  It creates excess supply
• What are the advantages of maximum and minimum prices?

  • Can be set where MSB=MSC to consider externalities
  • Maximum prices ensure affordability; minimum prices ensure fair prices for producers
  • Can reduce poverty and increase equity

  
• What are the disadvantages of maximum and minimum prices?

  • Distortion of price signals causing excess supply/demand
  • Difficulty in knowing where to set prices
  • Potential for black markets and illegal practices

  
• Where have maximum prices been implemented?

  In Manhattan for rent controls and in Venezuela for essential goods
• What is the purpose of tradable pollution permits?

  To allow companies to pollute up to a specific amount while limiting overall pollution
• How do tradable pollution permits encourage companies to reduce emissions?

  By allowing companies to buy and sell permits, creating a financial incentive to use greener technology
• What are the advantages of tradable pollution permits?

  • Guarantees that pollution will fall to government-set targets
  • Raises revenue through permit sales and fines
  • Encourages investment in green technology
  • Allows firms to make decisions about pollution reduction

  
• What are the disadvantages of tradable pollution permits?

  • Expensive to monitor and enforce
  • Raises costs for businesses, likely passed to consumers
  • Difficulty in determining the number of permits to allow

  
• What is an example of a successful tradable pollution permit scheme?

  The US Sulphur trading scheme, which reduced sulphur dioxide by 40%
• What are public goods characterized by?


  They are non-excludable and non-rivalrous
• Why does the free market under-provide public goods?

  Due to the free rider problem
• What are the advantages of state provision of public goods?

  • Corrects market failure by providing essential goods
  • Improves social welfare
  • Promotes equality by ensuring access to basic goods

  
• What are the disadvantages of state provision of public goods?

  • Requires government funding, which may have opportunity costs
  • Potential inefficiencies in provision
  • Difficulty in determining the appropriate level of provision

  
• What percentage reduction in greenhouse gases is presented?

  21%
• Which greenhouse gas has been included in the scheme besides carbon dioxide?

  Nitrous oxide
• In which country has the permit scheme been introduced?

  China
• What are the characteristics of public goods?

  • Non-excludable
  • Non-rivalry
  • Leads to the free rider problem
• Why are public goods under-provided by the free market?

  Because of the free rider problem
• How does the government provide public goods?

  Through taxation
• What is a merit good?


  A good that the government provides to ensure access for everyone
• What are the advantages of government provision of public goods?

  • Corrects market failure
  • Improves social welfare
  • Promotes equality
  • Ensures a healthy workforce
  • Ensures efficiency through competitive tenders

  
• What are the disadvantages of government provision of public goods?

  • High opportunity cost
  • Administration costs
  • Wrong combination of goods produced
  • Inefficiency in production
  • Risk of corruption and conflicting objectives

  
• What public goods does the UK government provide?

  Roads, education, and healthcare
• What issue does the NHS face according to the study material?

  Severe underfunding