AS Level Microeconomics Review

Flashcards for AS Level Microeconomics Review

Tax on Cigarettes

An indirect tax imposed by the government that increases the cost of production for cigarette manufacturers.

Effect of Tax on Supply Curve

The supply curve shifts vertically upward by the amount of the tax.

incedence of Tax

The tax creates a wedge between the price consumers pay and the price producers receive.

Immediate Market Effects of Tax

Higher price for consumers, lower effective price for producers, and reduced quantity traded.

Tax Burden

Shared between consumers and producers.

Tax Burden and Elasticity of Demand

If demand is inelastic, consumers bear a larger share; if demand is elastic, producers bear a larger share.

Deadweight Loss

A triangle representing the loss of economic efficiency due to some mutually beneficial trades no longer taking place.

Government Tax Revenue

Tax per unit multiplied by the new quantity sold (tax × Q2).

Cause: Tax Imposed -> Effect

Supply curve shifts up.

Cause: Higher Production Costs -> Effect

Reduced quantity supplied at each price.

Cause: New Equilibrium -> Effect

Price rises, quantity falls.

Cause: Price Elasticity Determines -> Effect

Who bears the tax burden.

Cause: Reduced Transactions -> Effect

Deadweight loss occurs.

Pigouvian Tax

A tax that can internalize external costs by making polluters pay for the social damage they cause.

Effect of Pigouvian Tax

Reduces output from Qmarket to Qsocial and eliminates the deadweight loss.

Incentives Created by Tax

Reduce production of the harmful good, invest in cleaner technologies, and find substitutes with lower external costs.

Use of Tax Revenue

Used to fund environmental cleanup or invest in renewable alternatives.

Information Problems with Taxes

Estimating the exact size of external costs is extremely difficult.

Administrative Costs of Taxes

Monitoring and enforcement can be high.

Practical Implementation Issues with Taxes

Risk of tax avoidance or evasion.

International Competitiveness and Taxes

Concerns if other countries don't impose similar taxes.

Regressive Effect of Taxes

May disproportionately affect low-income households.

Unintended Consequences of Taxes

Could lead to illegal markets or cross-border shopping.

Firm Relocation and Taxes

Firms might relocate to countries with lower environmental standards.

Time Lags and Taxes

Behavioral change may take time to occur.

Success of Taxes Depends On

Accurate estimation of external costs, effective enforcement, and consideration of distributional effects.

Strengths of Tax Policies

Market-based solution preserving choice, generates revenue for government, and creates incentives for innovation.

Weaknesses of Tax Policies

Difficult to estimate optimal tax rate, regressive effects on low-income groups, administrative and enforcement costs, and potential for tax avoidance.

Strengths of Subsidies

Can correct positive externalities, supports socially beneficial activities, and may improve equity.

Weaknesses of Subsidies

Opportunity cost of government spending, risk of government failure, may create dependency, and difficult to remove once established.

Strengths of Regulation

Can achieve specific environmental/safety standards, certainty of outcome, and may be necessary when market solutions fail.

Weaknesses of Regulation

Lacks flexibility, high compliance costs, may stifle innovation, and information problems for regulators.

Dynamic Analysis

Consider how elasticities change over time.

Technology Effects

Technology adaptation and innovation effects.

Distributional Effects

Who benefits and who loses.

Progressive vs Regressive Impacts

Progressive vs regressive impacts.

Government Failure

Information asymmetries, political considerations, and regulatory capture.

International Considerations

Competitiveness effects, carbon leakage, and need for international coordination.

PACED Approach

Point out, Analyze, Calculate, Explain, Discuss.

Analyzing a Tax Graph

Showing the effect of an indirect tax on the market.

Correct Slope of Curves

Demand slopes downward, supply slopes upward.

Shifts vs Movements

Price changes cause movements; other factors cause shifts.

Correct Labeling of Axes

Always label Price (P) on Y-axis, Quantity (Q) on X-axis

Taxes and Supply

The tax decreases supply.

Elasticity in Tax Incidence Analysis

Always consider who bears the burden based on relative elasticities.

Deadweight Loss

Always identify and explain efficiency losses.

Evaluation Phrases

Balanced evaluation with 'however' statements.

Vague Statements

Specific conditions: 'depends on the price elasticity of demand'.

2-4 Mark Questions

Quick definitions and simple explanations with one clear diagram if required

6-8 Mark Questions

Detailed explanation with chain of reasoning, well-labeled diagram, and brief evaluation if asked.

10-15 Mark Questions

Comprehensive analysis, substantial evaluation, multiple diagrams if relevant, and clear conclusion.

The 3-2-1 Rule for Evaluation

3 points supporting the argument, 2 points against the argument, and 1 clear conclusion weighing up both sides.

"Explain"

Analysis only (no evaluation needed).

"Assess"

Analysis + Evaluation required.

"Evaluate"

Heavy emphasis on evaluation.

"To What Extent"

Evaluation-heavy question.

Correct Graph Setup

Original supply and demand curves properly labeled, Tax-shifted supply curve drawn parallel to original, both equilibrium points clearly marked.

Price and Quantity Analysis

Identification of price consumers pay (Pc), Identification of price producers receive (Pp), Calculation: Tax = Pc - Pp, Explanation of quantity reduction.

Tax Burden Analysis

Consumer burden = Pc - P, Producer burden = P - Pp, Link to elasticity: 'The more inelastic the demand, the greater the consumer burden'.

Welfare Effects

Deadweight loss triangle identification, Government revenue rectangle, Explanation of efficiency loss.

Limitations and Challenges of Tax Policy

Estimating the optimal tax rate is extremely difficult due to information asymmetries

Market Failure Identification

The free market fails because firms only consider private costs (MPC) and ignore external costs imposed on society

Overproduction Explanation

Since MSC > MPC, the social optimum occurs at a lower quantity (Qsocial) than the market equilibrium (Qmarket)

Government intervention

regulation and or taxes