Why and how governments intervene in markets: Reasons for government intervention in markets

Overview

Recall questions on Reasons for government intervention in markets, State provision and regulation, Minimum and maximum prices.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is one reason governments intervene in markets?

   Model answer

   To correct market failure.

2. 2

   Besides correcting market failure, what other key objective motivates government intervention in markets?

   Model answer

   To reduce income inequality.

3. 3

   Define a specific tax.

   Model answer

   A fixed monetary amount levied per unit of a good or service sold.

4. 4

   What is an ad valorem tax?

   Model answer

   A tax levied as a percentage of the price or value of a good or service.

5. 5

   How does a specific tax affect the position of the supply curve?

   Model answer

   It shifts the supply curve vertically upward by a constant amount at every quantity, creating a parallel shift.

6. 6

   Explain how an ad valorem tax affects the shape of the supply curve differently from a specific tax.

   Model answer

   An ad valorem tax causes the supply curve to pivot, with the vertical distance between the old and new supply curves increasing as price rises.

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