Government Intervention Workshop

Economics | Year one | High Level

Teacher Juan Sebastián Salinas
Unit 3 | The Visible Hand
Assessment Objectives: AO1, AO2, AO3, AO4
Estimated time: 2 hours.

Names:

Paper 1 style questions

Choose one set of questions.

Set A

1. Explain two reasons why a government might set a price ceiling (máximum price) on
a good (10 marks)
2. Using real-world examples, discuss the consequences of a price ceiling on
stakeholders (15 marks)

Set B
1. 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. (10 marks)
2. Using real-world examples, evaluate the effects for stakeholders of a government
imposing an indirect tax on a particular good.

Paper 2 and 3 Style Questions

 Taxes on fuel
India is said to have the highest taxes on fuel in the world. At the current market
equilibrium, the price of petrol (gasoline) in New Delhi is comprised of the components
shown in Table 4 (approximate figures).
Table 4

Figure 2 illustrates the market for petrol in New Delhi. D represents the demand for
petrol in millions of litres per day. S + t represents the supply (incorporating the effect of
indirect tax) of petrol in millions of litres per day.
Figure 2

1. On Figure 2, draw the market supply curve without the indirect taxes for petrol in
New Delhi. (2 marks)
2. Using Figure 2, calculate the revenue (in rupees per day) collected from the indirect
taxes on petrol in New Delhi. (4 marks)

3. Using Figure 2 and your answer to part 1, calculate the loss in consumer surplus which
results from the imposition of indirect taxes on petrol in New Delhi. (4 marks)

4. Using Figure 2 and your answer to part 1, show that in the absence of indirect taxes
the supply of petrol in New Delhi would be price inelastic. (4 marks)

5. Using Figure 2 and the information in Table 4, calculate the change in the total profit
earned by petrol suppliers in New Delhi per day before and after the imposition of the
indirect tax. (4 marks)

6.Using the text/data provided and your knowledge of economics, recommend a policy
which could be introduced by the government of India in order to address the problem of
traffic congestion in New Delhi. (5 marks)