Why do governments intervene in markets?

To correct market failure and improve the allocation of resources, and to pursue wider objectives such as greater equity.

At what level should a tax designed to internalise an external cost be set?

It should equal the marginal external cost at the socially optimum output, so that private cost is raised to equal social cost.

A specific tax of £2.00 per unit raises the market price from £10.00 to £11.50, and 800 units are then sold. Calculate the consumers' share of the tax and the revenue raised.

Consumers bear £1.50 of every £2.00, which is 75% of the tax, and the revenue raised is 800 × £2.00 = £1,600.

What determines how an indirect tax is split between consumers and producers?

The relative elasticities of demand and supply: the more inelastic side of the market bears the larger share, so with inelastic demand most of it falls on consumers.

OCR A-Level Economics H460

Introduction to Microeconomics

Topic overview Economic and free goods, scarcity and positive and normative statements Economic agents and the factors of production Factor rewards, rationality and the objectives of economic agents Incentives and the functions of the price mechanism Market, planned and mixed economies and allocative and productive efficiency Opportunity cost, trade-offs and the production possibility curve Shifts of the production possibility curve and uses of opportunity cost

Microeconomics: The Role of Markets

Topic overview Specialisation, the division of labour and barter Money as a medium of exchange and the gains from specialisation Individual and market demand and joint, competitive and composite demand Movements along and shifts of the demand curve Individual and market supply and joint and competitive supply Movements along and shifts of the supply curve Consumer surplus and producer surplus How changes in price affect consumer and producer surplus Ceteris paribus and market equilibrium and disequilibrium Changes in demand and supply and their effects on related markets Price and income elasticity of demand and total revenue Cross elasticity, price elasticity of supply and the uses of elasticity Marginal utility, marginal cost and decisions at the margin Market failure and marginal social cost and benefit Positive and negative production and consumption externalities Information failure, asymmetric information and merit and demerit goods Merit and demerit good diagrams and correcting information failure Public, private and quasi-public goods The free rider problem and the provision of public goods Indirect taxes and subsidies to correct market failure State provision, price controls, buffer stocks and legislation Regulation, tradable pollution permits and government failure

Microeconomics: Business Objectives

Topic overview Profit maximisation and alternative business objectives Corporate social responsibility and the principal-agent problem Fixed, variable, average and marginal costs Diminishing returns and economies and diseconomies of scale Total, average and marginal revenue Profit, loss and normal and supernormal profit

Microeconomics: Market Structures

Topic overview Perfect competition in the short and long run and allocative efficiency Productive efficiency and perfect competition as a benchmark Monopoly characteristics, equilibrium and static efficiency Dynamic efficiency, price discrimination and natural monopoly Characteristics of monopolistic competition and its short run equilibrium Long run equilibrium and efficiency in monopolistic competition Characteristics of oligopoly, concentration ratios and the kinked demand curve Non-price competition, collusion and the pros and cons of oligopoly Characteristics of contestable markets, sunk costs and hit-and-run entry Efficiency, barriers and the limits of contestable markets

Microeconomics: The Labour Market

Topic overview Derived demand for labour and wage elasticity of demand Labour productivity, unit labour costs and marginal revenue product Supply of labour and wage elasticity of supply Short and long run labour supply, transfer earnings and economic rent Wage differentials, labour mobility and monopsony Trade unions, bilateral monopoly and the effects of monopsony Wage determination in a competitive labour market and labour market flexibility

Macroeconomics: Aggregate Demand and Aggregate Supply

Topic overview The circular flow of income, injections and leakages Methods of measuring national income Components of aggregate demand and their determinants The slope of the aggregate demand curve and what shifts it Consumption, income and the role of expectations Short run and long run aggregate supply curves Shifts in short run and long run aggregate supply Macroeconomic equilibrium and the effects of demand and supply shifts The national income multiplier and marginal propensities The accelerator, the economic cycle and output gaps

Macroeconomics: Economic Policy Objectives

Topic overview Economic growth, real and nominal GDP and GDP per capita Short and long run growth, the economic cycle and the effects of growth Economic structure, deindustrialisation and sustainable development Limitations of GDP and the Human Development Index Employment, unemployment rates and the objective of full employment Measures, types and costs of unemployment and the effects of full employment Inflation, deflation, real values and the CPI and RPI Calculating inflation with index numbers and its causes and consequences Balance of payments accounts and current account calculations Causes and consequences of current account imbalances Key trends in UK macroeconomic performance Comparing UK performance internationally and the limits of economic data Income and wealth, redistribution and absolute and relative poverty Lorenz curves, the Gini coefficient and the causes of poverty The natural rate of unemployment and Keynesian and neo-classical aggregate supply Short and long run Phillips Curves and their usefulness

Macroeconomics: Implementing Policy

Topic overview The government budget, types of tax and the budget balance National debt, cyclical and structural deficits and crowding out The Laffer curve, average and marginal tax rates and limits of fiscal policy Interest rates, the money supply and inflation targets Quantitative easing, the exchange rate and limits of monetary policy Privatisation, deregulation and subsidies as supply side policies Competition policy, infrastructure, education and tax and benefit reform Labour market flexibility, immigration control and limits of supply side policy Conflicts between macroeconomic policy objectives

Macroeconomics: The Global Context

Topic overview Patterns of international trade and global supply chains Advantages and disadvantages of international trade Exchange rate calculations and how exchange rates are determined Exchange rate changes, the Marshall-Lerner condition and exchange rate systems Globalisation, international competitiveness and comparative advantage Terms of trade and the impact of globalisation and emerging economies Protectionism and the effects of a tariff Quotas, trade creation, economic integration and the World Trade Organisation

Macroeconomics: The Financial Sector

Topic overview Functions of money, credit creation and narrow and broad money The quantity theory of money and interest rates in the money market Roles of the financial sector, saving and investment The Harrod-Domar model and microfinance Financial regulation and the functions of a central bank Monetary policy effectiveness, limits of regulation and the IMF

Quantitative Skills for Economics

Topic overview Ratios, percentages, averages, graphs, index numbers and real values Cost, revenue, profit and elasticity calculations

Themes in Economics: Synoptic Application

Topic overview Choosing models and judging data and assumptions in an unseen theme Efficiency, equity, sustainability and ethics in economic judgements

Microeconomics: The Role of Markets

Indirect taxes and subsidies to correct market failure

3 things to know
Component 01

Overview

Recall questions on why governments intervene, indirect taxes on goods with external costs, tax incidence calculations, and per-unit subsidies with their costs and drawbacks.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

How does a per-unit subsidy appear on a demand and supply diagram?

Process

How does an indirect tax on a good with external costs work on the diagram?

Key term

What are two drawbacks of using taxation to correct market failure?

Questions from this subtopic

Each one with the model answer underneath.

1
Why do governments intervene in markets?
Model answer
To correct market failure and improve the allocation of resources, and to pursue wider objectives such as greater equity.
2
How does an indirect tax on a good with external costs work on the diagram?
Model answer
The tax raises producers' costs, shifting the supply curve upwards and to the left by the amount of the tax, so price rises and quantity falls towards the social optimum.
3
At what level should a tax designed to internalise an external cost be set?
Model answer
It should equal the marginal external cost at the socially optimum output, so that private cost is raised to equal social cost.
4
A specific tax of £2.00 per unit raises the market price from £10.00 to £11.50, and 800 units are then sold. Calculate the consumers' share of the tax and the revenue raised.
Model answer
Consumers bear £1.50 of every £2.00, which is 75% of the tax, and the revenue raised is 800 × £2.00 = £1,600.
5
What determines how an indirect tax is split between consumers and producers?
Model answer
The relative elasticities of demand and supply: the more inelastic side of the market bears the larger share, so with inelastic demand most of it falls on consumers.
6
What are two drawbacks of using taxation to correct market failure?
Model answer
The external cost is very hard to value so the tax is rarely set at the right level, and taxes on price-inelastic demerit goods cut consumption little while falling hardest on low-income households.

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Introduction to Microeconomics

Microeconomics: The Role of Markets

Microeconomics: Business Objectives

Microeconomics: Market Structures

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An of demand.

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AAt 0% nothing is levied at all.

BAt 100% there is no reward left for the taxed activity.

CThe activity ceases and there is nothing to tax.

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