Ch13 Government Micro intervention

Front

What is an ad valorem tax?

Back

An ad valorem tax is one where the tax consists of a proportion or percentage of the selling price. A General Services Tax fixed at a given percentage, like 13%, is an example.

Front

What is a specific tax?

Back

A specific tax is one where the tax is a fixed sum per unit of the good purchased, such as $1 per litre of fuel.

Front

What is the incidence of an indirect tax?

Back

The incidence of an indirect tax is the extent to which the tax burden is paid by the producer, the consumer, or both. The more price inelastic the demand, the easier it is for the seller to pass on the tax to the consumer in the form of a higher price.

Front

What is a subsidy?

Back

A subsidy is a direct payment made by a government to producers of goods and services.

Front

What happens when a subsidy is introduced?

Back

When introduced, a subsidy reduces the price of the product to consumers and increases the quantity of the product that is traded in a market.

Front

What is a maximum price?

Back

A maximum price is a price ceiling in a market, often imposed on staple foodstuffs to assist low-income families.

Front

How can the market return to an equilibrium position?

Back

The market might return to an equilibrium position if the government buys up surplus stocks, reducing supply and forcing the price upwards.

Front

What happens if the maximum price is below the equilibrium price?

Back

If the maximum price is below the equilibrium price, farmers would supply less, leading to a shortage as demand exceeds supply. Some farmers may sell on the informal market.