Role of government in microeconomic Paper 1

IBDP Economics  HL – Microeconomics – Role of government in microeconomic -Paper 1 Exam Style Practice Questions

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Role of government in microeconomic Paper 1? 

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Exam Style Question for IBDP Economics HL- Role of government in microeconomic -Paper 1

Question

A government decides to impose an indirect tax on unhealthy drinks. Discuss the consequences for the stakeholders in these markets.

▶️Answer/Explanation

Answers may include:

  • definitions of indirect tax and stakeholders
  • diagram to show the impact of an indirect tax
  • explanation of how an indirect tax might affect consumers, producers and the government
  • examples of unhealthy drinks and taxes on such products
  • synthesis or evaluation (discussion) of the consequences for the different stakeholders.

Question

Using an appropriate externalities diagram, explain why a government might decide to impose a price floor on a demerit good

▶️Answer/Explanation

Answers may include:

  • definition of demerit good, price floor
  • diagram to show a negative externalities of consumption diagram with a price floor (minimum price) shown
  • explanation of why a government might place a price floor above the equilibrium price in the market for a demerit good, in terms of negative externality arguments, and reducing consumption
  • examples of price floors being imposed on demerit goods in practice.

Question

Evaluate the view that the most effective way in which the government can discourage the consumption of demerit goods is through government regulations.

▶️Answer/Explanation

Answers may include:

  • definition of demerit goods, government regulations
  • diagram to illustrate reduction of negative externalities eg tax diagram or a change in demand due to the enforcement of regulation
  • explanation of how regulation could discourage the consumption of demerit goods
  • examples of government regulations on demerit goods in practice
  • synthesis and evaluation.

Question

Discuss how the introduction of a subsidy in a market will affect consumers, producers and the government.

▶️Answer/Explanation

Answers may include:

  • definition of subsidy
  • diagram to show the imposition of a subsidy and the consequences for the three stakeholders
  • explanation of how a subsidy lowers the price of the product and may lead to increased consumption/consumer surplus by consumers, increased production/revenue/producer surplus for producers and increased government expenditure
  • examples of markets where subsidies have been introduced in practice
  • synthesis or evaluation (discuss).

Question

Explain why governments impose price floors in the market for agricultural products.

▶️Answer/Explanation

Answers may include:

  • definition of price floor
  • diagram showing the imposition of a price floor leading to higher prices and higher producer revenues
  • explanation that governments impose price floors in the market for agricultural products to support producers by increasing producers’ revenues and/or improving producers’ ability to plan and invest for the future 
  • examples of specific agricultural markets where price floors have been imposed.

Question

Explain why governments provide subsidies.

▶️Answer/Explanation

Answers may include:

  • definitions of subsidy
  • diagram showing the imposition of a subsidy leading to higher producers’ revenues (including the subsidy), lower prices and higher level of production/consumption
  • explanation that governments provide subsidies to stimulate the production and consumption of merit goods (e.g. education, healthcare) and to support certain producers/consumers for political reasons
  • examples of specific markets where subsidies have been provided in practice.

Question

Discuss the view that governments should tax the consumption of gasoline (petroleum).

▶️Answer/Explanation

Answers may include:

  • definition of indirect tax if not given in part (a)
  • diagram of negative externalities in the consumption of gasoline
  • explanation that governments have a number of reasons why they might use indirect taxes on gasoline, such as revenue, the correction of negative externalities of consumption
  • example(s) of where governments have taxed (or subsidized) gasoline
  • synthesis or evaluation (discuss).

Question

Explain two reasons why a government might want to subsidize a good or service.

▶️Answer/Explanation

Answers may include:

  • definition of subsidy
  • diagram to show the effect of a subsidy on a good or service
  • explanation that governments might introduce a subsidy for different reasons, to correct externalities, to protect domestic industry
  • example(s) of goods and services that governments subsidize and the reasons for doing so.
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