Role of government in microeconomics Paper 1

IBDP Economics  SL  – Microeconomics- Role of government in microeconomics Paper 1- Exam Style Practice Questions

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Role of government in microeconomics Paper 1

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Exam Style Question for Microeconomics-Role of government in microeconomics Paper 1

Question

Explain two reasons why a government might impose an indirect tax on a good.

▶️Answer/Explanation

Answers may include:

  • definition of indirect tax
  • diagram to show the impact of an indirect tax on a good
  • explanation that governments impose indirect taxes on goods to raise revenue, reduce consumption of demerit goods and reduce the negative externalities of production
  • examples of situations where governments impose indirect tax.

Question

Evaluate the impact that an increase in indirect tax might have on consumers and producers.

▶️Answer/Explanation

Answers may include:

  • definition of indirect tax
  • diagram to show the impact of an indirect tax on consumers and producers
  • explanation that indirect tax increases the price consumers have to pay for goods and services and reduces the revenue producers receive from selling goods and services
  • examples of how indirect taxes affect consumers and producers
  • synthesis or evaluation.

Question

Explain why a government might decide to impose a price ceiling on goods and services such as essential foods or rented housing.

▶️Answer/Explanation

Answers may include:

  • definition of price ceiling
  • diagram to show a price ceiling
  • explanation of why a government might place a maximum price below equilibrium price in a particular market eg market power, political considerations, equity issues (making essential goods and services available to those on low incomes),
    externality issues
  • examples of maximum prices being imposed on goods or services in practice in relation to particular economies, or in relation to particular goods/services.

Question

Evaluate the view that the most effective way in which the government can encourage the consumption of merit goods is through direct provision.

▶️Answer/Explanation

Answers may include:

  • definition of merit goods, direct provision
  • diagram: use of any relevant diagram, set in context, such as MSB/C, maximum price or a subsidy diagram
  • explanation that direct provision could encourage greater consumption of merit goods
  • examples of direct provision of merit goods eg education, healthcare, public transport
  • synthesis and evaluation.

Question

Discuss the view that the provision of subsidies by the government on goods such as agricultural products will always be beneficial to stakeholders.

▶️Answer/Explanation

Answers may include:

  • definition of subsidy, stakeholders
  • diagram to illustrate subsidy showing impact on market price, government spending, producer revenue
  • explanation that the provision of subsidies benefits producers and consumers
  • examples of subsidies on agricultural products or other goods
  • synthesis and evaluation (discuss).

Question

Explain the impact of a price floor on market outcomes.

▶️Answer/Explanation

Answers may include:

  • definition of price floor
  • diagram to show the effect of a price floor
  • explanation that a price floor can lead to excess supply in the market, inefficient resource allocation, government measures to dispose of a surplus and welfare impacts
  • examples of a price floor being used.

Question

Discuss the consequences for different stakeholders when the government imposes a price ceiling on a market.

▶️Answer/Explanation

Answers may include:

  • definitions of stakeholders, price ceiling
  • diagram to show the effect of a price ceiling
  • explanation of how a price ceiling can affect consumers, producers and the government. Some consumers will experience a lower price and some will not be able to access the good, producers will experience a fall in revenues and the government will have the cost of administering the price ceiling
  • examples of where price ceilings have been used
  • synthesis or evaluation (discuss).

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 two reasons why a government might impose indirect taxes.

▶️Answer/Explanation

Answers may include:

  • definition of indirect taxes
  • diagram to illustrate the imposition of an indirect tax, with the supply curve shifting left, price increasing and quantity demanded decreasing
  • explanation that indirect taxes may be imposed to raise tax revenue, to discourage the consumption of demerit goods, to correct negative externalities in production, trade protection, to redistribute income, e.g. excise taxes on luxury goods
  • examples of goods on which indirect taxes are imposed.

Question

Explain the impact on consumers, producers and the government of a price floor being introduced in an agricultural market.

▶️Answer/Explanation

Answers may include:

  • definition of price floor
  • diagram to show the impact of a price floor on an agricultural market
  • explanation of how a price floor leads to a higher price and lower quantity demanded from consumers, and a higher price to producers increases quantity supplied because it increases revenues and an opportunity cost to governments because of the expense of buying surplus production
  • examples of agricultural markets.

Question

Evaluate the view that a price ceiling is an ineffective policy to protect low-income consumers.

▶️Answer/Explanation

Answers may include:

  • definition of price ceiling
  • diagram to show the impact of a price ceiling on the market for a necessity good
  • explanation of how a price ceiling leads to excess demand/shortage for a necessity good and leads to problems like queues, parallel markets and corruption
  • examples of the use of price ceilings
  • synthesis or evaluation.

Question

Explain two reasons why a government might set a price ceiling (maximum price) on a good.

▶️Answer/Explanation

Answers may include:
• Definition: price ceiling (maximum price).
• Explanation: of the government’s motives for introducing a price ceiling, such as equity and accessibility.
• Diagram: showing price ceiling (maximum price).

Question

Using real-world examples, discuss the consequences of a price ceiling on stakeholders.

Answers may include:

▶️Answer/Explanation

• Definition: price ceiling, stakeholders.
• Explanation: impact of a price ceiling on stakeholders:

  • Consumers: shortages, lower prices, parallel/unofficial markets and the possible means to resolve a shortage (queues), possible reduced quality of goods, benefits such as access for low income families especially during inflation, equity.
  • Producers: discouragement of suppliers to produce more because they cannot set prices and consequent reduction of availability, impact on signalling and incentive functions of price.
  • Government: need for intervention to overcome shortages (rationing).

Question

Governments intervene in markets to support firms and to promote equity. Explain one policy that could be used to support firms and one policy that could be used to promote equity.

▶️Answer/Explanation

Answers may include:

  • Terminology: government intervention, market, equity
  • Explanation: of any one policy to support firms, such as a subsidy, a minimum price (price floor) or trade protection and any one policy to promote equity, such as a maximum price (price ceiling), direct government provision of services or subsidy, progressive taxation (labour market)
  • Diagram: any relevant diagram illustrating the particular policy being explained.

Question

Using real-world examples, evaluate the effects for stakeholders of a government imposing an indirect tax on a particular good.

▶️Answer/Explanation

Answers may include:

  • Terminology: indirect tax, stakeholders
  • Explanation: that the tax will shift the supply curve to the left/upwards, increase the price and reduce the quantity demanded/supplied; explanation of the possible consequences for consumers, producers, workers, the government and society as a whole
  • Diagram: a demand and supply diagram showing the impact of a shift of the supply curve to the left increasing price and reducing quantity demanded/supplied
  • Synthesis (evaluate): the importance of PED and PES, the impact on resource allocation and allocative efficiency, whether the tax is specific or ad valorem, the regressive nature of indirect tax and the extent of the increase in taxation
  • Examples: use of real-world examples to show instances of indirect taxes being imposed on goods.

Question

Explain two forms of government intervention in markets.

▶️Answer/Explanation

Answers may include:

  • Terminology: government intervention, markets.
  • Theory: explanation of any two of the following forms of government intervention: price ceilings (maximum prices), price floors (minimum prices), indirect taxes, subsidies, direct provision of services, command and control regulation and/or legislation. An import tariff intervention and related diagram is equally rewarded.
  • Diagram: showing how governments intervene in markets (price ceilings, price floors, indirect taxes and/or subsidies).

Question

Evaluate the view that the most effective way in which the government can encourage the consumption of merit goods is through direct provision.

▶️Answer/Explanation

Answers may include:

  • definition of merit goods, direct provision
  • diagram: use of any relevant diagram, set in context, such as MSB/C, maximum price or a subsidy diagram
  • explanation that direct provision could encourage greater consumption of merit goods
  • examples of direct provision of merit goods eg education, healthcare, public transport
  • synthesis and evaluation.
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