- Economics 17

2/12/25 Regulation Pt 2 - 8/12/25 Government Intervention - 9/12/25 Taxes

Define price floors (a.k.a minimum price)

Keep the price above a certain point, below which it is illegal to trade.

What is the main common purpose of price floors

To increase the price of demerit goods

Is a price floor set above or below the free market price

ABOVE

Show a price floor

PQ to PminQd, PminQs

List the advantages of price floors (2)

• Ensures fair price for producers, and guarantees supply (“food security”).

• If the price is correct for demerit goods, the higher price can internalise the externality.

List the disadvantages of price floors (3) (min.2)

• Overproduction (surplus) of the good/service, which leads to wastage.

• For demerit goods (inelastic PED), unlikely to have much change on quantity demanded.

• Extra cost for the government, because they have to purchase the excess.

Define direct provision

When the government directly provides a good or service, using tax payers’ money.

List examples of where direct provision is used (min. 2)

• Bridges/roads

• Public services

• NHS

• Police

Show direct provision

Define Pro-Free market economists

Economists who believe the free market mechanism works efficiently.

Define Interventionist economists

Economists who believe that too often, markets are uncompetitive and are prone to market failure.

Define indirect tax (again)

A tax on a good or service, rather than income or profits.

Name the two types of indirect tax

• Specific

• Ad Valorem

Define Specific tax

Fixed amount of tax per unit (e.g. tax on fizzy drink is 30p per unit)

Define Ad Valorem

Taxes charged as a proportion of the price (e.g. VAT is 20% of price).

List the objectives of indirect taxation (3)

• Discourage the production/consumption of goods with negative externalities, and produce/consume at the social optimum output.

• Internalise the externality, by making economic agents who benefit from the good/service account for the true cost to society.

• Use the taxation revenue to offset the effects of the externalities.

Show an indirect tax

List the 5 STAGES of how indirect taxes work

• Tax duty increases cost per unit produced (affects the s curve).

• Cost of production (CoP) increases, so S curve shifts to the left - profit incentive reduced.

• Equilibrium price INCREASES and output DECREASES.

• Vertical distance between S curves is the tax per unit.

• Shaded area is the total tax collected by the government.

Define incidence of tax

The proportion of tax that is passed on to the consumer.

Regarding PED, what do producers have to consider when determining the greatness of the incidence of tax to pass on

Producers have to consider the good’s elasticity:

ELASTIC) pass on low to none, as it would have a huge impact on qd.

INELASTIC) can pass the entirety of it, as it will have little impact on qd.