Government Intervention in Markets: Taxes, Subsidies, Maximum Prices, Minimum Prices, Regulation
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Why might a government impose an indirect tax on cigarettes?
A to increase supply of cigarettes
B to reduce consumption of a demerit good
C to lower the market price of cigarettes
D to increase external benefits from smoking
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An indirect tax on producers usually causes
A supply to shift right
B supply to shift left
C demand to shift right
D demand to shift left
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A subsidy to producers usually causes
A supply to shift right
B supply to shift left
C demand to shift left
D quantity demanded to fall at every price
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A maximum price is most likely to be effective when it is set
A above the equilibrium price
B below the equilibrium price
C equal to the equilibrium price
D at any price chosen by firms
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A minimum price is most likely to be effective when it is set
A below the equilibrium price
B above the equilibrium price
C equal to the equilibrium price
D at zero price
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A maximum price set below equilibrium is likely to cause
A excess supply
B surplus
C excess demand
D lower demand
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A minimum price set above equilibrium is likely to cause
A shortage
B excess demand
C surplus
D no supply
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Which policy is most likely to reduce the price paid by consumers and increase quantity traded?
A indirect tax
B subsidy
C minimum price above equilibrium
D regulation increasing production costs
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Which policy is most likely to increase the price paid by consumers and reduce quantity traded?
A subsidy
B indirect tax
C maximum price above equilibrium
D improved technology
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A government gives subsidies to bus companies to reduce traffic congestion. Which market failure is it mainly addressing?
A external costs from car use
B excess supply of buses
C public good failure only
D perfect information
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
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A tax per unit on a good causes the supply curve to shift vertically upwards by
A the amount of the tax
B the original equilibrium price
C the quantity demanded
D the external benefit
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A subsidy per unit causes the supply curve to shift vertically downwards by
A the amount of the subsidy
B the original price only
C the new quantity traded
D the amount of demand
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A government imposes a tax on petrol. Which is the most likely aim?
A increase petrol consumption
B reduce external costs such as pollution
C increase supply of petrol
D make petrol a public good
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A government subsidises vaccinations. Which is the most likely aim?
A reduce consumption of a demerit good
B increase consumption of a merit good with external benefits
C increase production costs
D create a shortage
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Which intervention is most suitable to correct underconsumption of a merit good?
A subsidy
B indirect tax
C minimum price
D ban
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Which intervention is most suitable to correct overconsumption of a demerit good?
A subsidy
B indirect tax
C maximum price below equilibrium
D free provision
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Which is an example of regulation?
A government sets safety standards for food producers
B government gives money to firms per unit produced
C government reduces production costs through grants
D government lets price move freely
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Which regulation is most likely to reduce negative externalities?
A requiring factories to install pollution filters
B lowering taxes on polluting firms
C subsidising petrol consumption
D removing environmental rules
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What is one possible disadvantage of strict regulation on firms?
A it may increase production costs
B it always increases profits
C it always lowers prices
D it removes all scarcity
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What is one possible disadvantage of subsidies?
A they may increase government spending
B they always reduce output
C they always increase unemployment
D they always create external costs
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What is one possible disadvantage of indirect taxes?
A they may increase prices for consumers
B they always increase supply
C they always reduce government revenue
D they always create shortages
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A maximum price is also called
A a price ceiling
B a price floor
C an indirect tax
D a subsidy
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A minimum price is also called
A a price ceiling
B a price floor
C a free good
D a public good
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Which policy is most likely to protect consumers from very high prices?
A maximum price
B minimum price
C indirect tax
D higher production costs
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Which policy is most likely to protect producers from very low prices?
A maximum price
B minimum price
C tax on producers
D removing subsidies
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
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A government sets a minimum wage above the equilibrium wage. What is the likely effect in the labour market?
A excess demand for labour
B excess supply of labour
C no unemployment possible
D labour demand shifts right automatically
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A government sets rent controls below the equilibrium rent. What is the likely effect?
A surplus of rented housing
B shortage of rented housing
C increase in supply of rented housing
D fall in demand for rented housing
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A maximum price below equilibrium may fail to help all consumers because
A shortages may occur
B price rises above equilibrium
C producers supply unlimited output
D demand becomes zero
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A minimum price above equilibrium may require government to
A buy surplus output
B create excess demand
C lower producer income
D ban all production
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Which intervention is most likely to create a black market?
A maximum price below equilibrium
B subsidy that increases supply
C tax that shifts supply left
D regulation requiring labels
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Why can a maximum price below equilibrium create queues?
A quantity demanded exceeds quantity supplied
B quantity supplied exceeds quantity demanded
C producers supply more than consumers want
D price is too high for consumers
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Why can a minimum price above equilibrium create unsold stock?
A quantity demanded exceeds quantity supplied
B quantity supplied exceeds quantity demanded
C demand shifts right automatically
D supply becomes zero
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A subsidy on wheat production is likely to
A increase wheat supply
B reduce wheat supply
C increase production costs
D reduce quantity demanded at every price
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An indirect tax on sugary drinks is likely to
A increase supply of sugary drinks
B reduce supply and raise price
C increase demand for sugary drinks
D make sugary drinks non-rival
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Which policy directly increases producer costs?
A subsidy
B indirect tax
C maximum price
D information campaign only
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Which policy directly reduces producer costs?
A subsidy
B indirect tax
C regulation requiring extra safety equipment
D minimum price
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Which policy is most likely to increase government revenue?
A indirect tax
B subsidy
C free provision
D maximum price below equilibrium
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Which policy is most likely to require government expenditure?
A indirect tax
B subsidy
C minimum price without surplus buying
D regulation only
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Which policy uses information rather than price changes?
A health warning labels on cigarettes
B indirect tax on cigarettes
C subsidy on school meals
D minimum price for agricultural goods
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Why might information campaigns be used for demerit goods?
A consumers may underestimate private costs
B consumers always have perfect information
C producers cannot supply the good
D price becomes zero
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
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Which policy combination is most likely to reduce cigarette consumption strongly?
A subsidy and advertising benefits of cigarettes
B indirect tax and health warnings
C maximum price below equilibrium and lower tax
D free provision and reduced regulation
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Which policy combination is most likely to increase education consumption?
A tax on schools and less information
B subsidy and awareness campaigns
C minimum price and reduced access
D ban and higher fees
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A tax on production creates a wedge between
A price consumers pay and price producers receive
B private benefit and market demand only
C population and labour force
D exports and imports only
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After a tax, consumers pay $12 and producers receive $9. What is the tax per unit?
A $3
B $9
C $12
D $21
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After a subsidy, consumers pay $8 and producers receive $11. What is the subsidy per unit?
A $3
B $8
C $11
D $19
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Which statement about tax incidence is correct?
A consumers always pay all of the tax
B producers always pay all of the tax
C the burden of tax can be shared between consumers and producers
D nobody pays tax if demand is inelastic
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If demand is price inelastic, an indirect tax is likely to be paid mainly by
A consumers
B producers only
C government
D foreign countries only
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If demand is price elastic, an indirect tax is likely to be paid mainly by
A consumers
B producers
C no one
D workers only
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Which intervention may reduce pollution but increase prices?
A environmental regulation increasing firms’ costs
B subsidy on fossil fuels
C maximum price on petrol
D removal of pollution controls
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Which statement is correct about government intervention?
A it always improves efficiency
B it can correct market failure but may also create unintended problems
C it always removes opportunity cost
D it only affects demand, never supply
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
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Answer: B
A wrong: indirect tax reduces supply, not increases it.
B correct: cigarettes are demerit goods, so tax raises price and reduces consumption.
C wrong: tax usually raises price.
D wrong: smoking creates external costs, not external benefits.
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Answer: B
A wrong: tax raises production costs, so supply does not shift right.
B correct: indirect tax increases costs and shifts supply left.
C wrong: tax on producers affects supply directly.
D wrong: demand does not shift directly.
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Answer: A
A correct: subsidy lowers production costs, so supply shifts right.
B wrong: supply shifts left when costs rise.
C wrong: subsidy affects supply directly.
D wrong: lower prices usually increase quantity demanded.
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Answer: B
A wrong: above equilibrium, a maximum price has no effect.
B correct: below equilibrium, a maximum price prevents price rising to equilibrium.
C wrong: equal to equilibrium has no effect.
D wrong: firms do not decide an effective maximum price.
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Answer: B
A wrong: below equilibrium, a minimum price has no effect.
B correct: above equilibrium, a minimum price prevents price falling to equilibrium.
C wrong: equal to equilibrium has no effect.
D wrong: zero price is not a meaningful minimum price.
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Answer: C
A wrong: excess supply occurs when price is too high.
B wrong: surplus is caused by price above equilibrium.
C correct: low maximum price causes quantity demanded to exceed quantity supplied.
D wrong: low price increases quantity demanded.
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Answer: C
A wrong: shortage occurs when price is below equilibrium.
B wrong: excess demand is a shortage.
C correct: high minimum price causes quantity supplied to exceed quantity demanded.
D wrong: producers will still supply at high prices.
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Answer: B
A wrong: indirect tax raises price and reduces quantity.
B correct: subsidy shifts supply right, lowering price and increasing quantity.
C wrong: minimum price above equilibrium raises price and causes surplus.
D wrong: higher costs reduce supply.
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Answer: B
A wrong: subsidy lowers price.
B correct: indirect tax shifts supply left, raising price and reducing quantity.
C wrong: maximum price above equilibrium is ineffective.
D wrong: improved technology lowers price and raises quantity.
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Answer: A
A correct: encouraging bus use can reduce car use, congestion and pollution.
B wrong: the problem is not excess supply of buses.
C wrong: buses are not pure public goods.
D wrong: perfect information is not the issue.
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
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Answer: A
A correct: a per-unit tax raises cost by the tax amount, shifting supply vertically upward by that amount.
B wrong: original price is not the size of the tax shift.
C wrong: quantity demanded does not determine the vertical tax shift.
D wrong: external benefit is unrelated.
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Answer: A
A correct: a per-unit subsidy lowers cost by the subsidy amount, shifting supply vertically downward by that amount.
B wrong: original price is not the subsidy.
C wrong: quantity traded is not the vertical shift.
D wrong: demand does not measure the subsidy.
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Answer: B
A wrong: petrol tax is meant to reduce consumption.
B correct: petrol use creates pollution and congestion external costs.
C wrong: tax reduces supply.
D wrong: petrol does not become a public good.
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Answer: B
A wrong: vaccination is not a demerit good.
B correct: vaccinations create external benefits and may be underconsumed.
C wrong: subsidy reduces effective cost.
D wrong: subsidy aims to reduce shortage/underconsumption.
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Answer: A
A correct: subsidy lowers price and encourages consumption.
B wrong: indirect tax discourages consumption.
C wrong: minimum price raises price and reduces consumption.
D wrong: ban stops consumption.
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Answer: B
A wrong: subsidy increases consumption.
B correct: indirect tax raises price and reduces consumption of demerit goods.
C wrong: maximum price would make the good cheaper.
D wrong: free provision increases consumption.
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Answer: A
A correct: safety standards are rules/laws, so regulation.
B wrong: money per unit is subsidy.
C wrong: grants/subsidies reduce costs, not regulation.
D wrong: free price movement is non-intervention.
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Answer: A
A correct: pollution filters reduce external costs from production.
B wrong: lower taxes may increase pollution.
C wrong: subsidising petrol may increase pollution.
D wrong: removing rules may increase external costs.
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Answer: A
A correct: strict rules may require extra equipment, checks or compliance costs.
B wrong: higher costs can reduce profits.
C wrong: higher costs may raise prices.
D wrong: scarcity remains.
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Answer: A
A correct: subsidies require government funding and may create opportunity cost.
B wrong: subsidies usually increase output.
C wrong: subsidies do not always increase unemployment.
D wrong: subsidies may reduce external costs if used correctly.
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Answer: A
A correct: indirect taxes raise costs and may be passed on as higher prices.
B wrong: tax reduces supply.
C wrong: tax can increase government revenue.
D wrong: tax does not always create shortages.
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Answer: A
A correct: a maximum price is a price ceiling.
B wrong: price floor means minimum price.
C wrong: indirect tax is a tax on spending/production.
D wrong: subsidy is financial support.
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Answer: B
A wrong: price ceiling means maximum price.
B correct: minimum price is a price floor.
C wrong: free good has no opportunity cost.
D wrong: public good is non-rival and non-excludable.
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Answer: A
A correct: maximum price prevents price rising above a set level.
B wrong: minimum price protects producers.
C wrong: indirect tax raises prices.
D wrong: higher costs raise prices.
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Answer: B
A wrong: maximum price protects consumers from high prices.
B correct: minimum price prevents price falling too low.
C wrong: producer tax increases costs.
D wrong: removing subsidies may lower producer support.
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
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Answer: B
A wrong: at a higher wage, firms demand fewer workers.
B correct: more workers want jobs than firms demand, creating excess supply of labour/unemployment.
C wrong: unemployment may occur.
D wrong: demand does not automatically shift right.
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Answer: B
A wrong: low rent discourages supply and increases quantity demanded.
B correct: rent control below equilibrium creates excess demand for housing.
C wrong: supply is likely to fall, not rise.
D wrong: demand rises at lower rent.
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Answer: A
A correct: lower price increases demand but reduces supply, causing shortages.
B wrong: the maximum price prevents price rising legally.
C wrong: producers do not supply unlimited output.
D wrong: demand increases, not zero.
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Answer: A
A correct: to maintain a high minimum price, government may buy unsold surplus.
B wrong: minimum price above equilibrium creates excess supply, not excess demand.
C wrong: minimum price aims to support producer income.
D wrong: production is not banned.
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Answer: A
A correct: shortages from low legal prices may lead to illegal selling at higher prices.
B wrong: subsidy increases supply and reduces shortage risk.
C wrong: tax may reduce quantity but does not directly create a black market like a binding price ceiling.
D wrong: labelling regulation does not usually create black markets.
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Answer: A
A correct: low price makes quantity demanded greater than quantity supplied, so consumers queue.
B wrong: that would be surplus.
C wrong: producers supply less than consumers want.
D wrong: the price is too low, not too high.
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Answer: B
A wrong: that would be shortage.
B correct: high price makes quantity supplied greater than quantity demanded.
C wrong: demand does not automatically shift right.
D wrong: supply does not become zero.
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Answer: A
A correct: subsidy lowers costs and increases supply.
B wrong: subsidy does not reduce supply.
C wrong: subsidy lowers effective costs.
D wrong: lower prices usually increase quantity demanded.
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Answer: B
A wrong: tax reduces supply.
B correct: tax raises production costs, shifting supply left and raising price.
C wrong: demand is not directly increased.
D wrong: sugary drinks remain rival goods.
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Answer: B
A wrong: subsidy reduces costs.
B correct: indirect tax adds to producer costs.
C wrong: maximum price controls price, not direct costs.
D wrong: information campaigns affect knowledge/tastes.
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Answer: A
A correct: subsidy is financial support that lowers effective production costs.
B wrong: tax increases costs.
C wrong: extra safety equipment increases costs.
D wrong: minimum price raises legal price, not direct cost.
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Answer: A
A correct: indirect taxes are a source of government revenue.
B wrong: subsidies require spending.
C wrong: free provision requires spending.
D wrong: maximum prices do not directly raise revenue.
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Answer: B
A wrong: indirect tax raises revenue.
B correct: subsidy requires government expenditure.
C wrong: a minimum price alone may not cost government unless surplus is bought.
D wrong: regulation may involve admin costs, but not direct per-unit expenditure like subsidy.
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Answer: A
A correct: warning labels provide information.
B wrong: indirect tax changes price.
C wrong: subsidy changes price/cost.
D wrong: minimum price changes legal price.
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Answer: A
A correct: consumers may not know or may underestimate health risks.
B wrong: if information were perfect, campaigns would be less needed.
C wrong: supply ability is not the main issue.
D wrong: information campaigns do not make price zero.
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.
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Answer: B
A wrong: subsidy and positive advertising would increase consumption.
B correct: tax raises price and warnings reduce information failure.
C wrong: maximum price/lower tax would make cigarettes cheaper.
D wrong: free provision and less regulation increase consumption.
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Answer: B
A wrong: tax and less information reduce consumption.
B correct: subsidy lowers price and campaigns increase awareness of benefits.
C wrong: minimum price and reduced access discourage use.
D wrong: ban and higher fees reduce consumption.
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Answer: A
A correct: tax creates a gap between what consumers pay and what producers keep.
B wrong: tax wedge is not between private benefit and demand.
C wrong: population/labour force is unrelated.
D wrong: exports/imports are unrelated.
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Answer: A
A correct: tax = price paid by consumers – price received by producers = $12 – $9 = $3.
B wrong: $9 is producer receipt.
C wrong: $12 is consumer price.
D wrong: $21 adds the two prices.
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Answer: A
A correct: subsidy = price received by producers – price paid by consumers = $11 – $8 = $3.
B wrong: $8 is consumer price.
C wrong: $11 is producer receipt.
D wrong: $19 adds the two prices.
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Answer: C
A wrong: consumers do not always pay all the tax.
B wrong: producers do not always pay all the tax.
C correct: tax incidence can be shared depending on elasticities.
D wrong: inelastic demand often means consumers pay more of the tax.
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Answer: A
A correct: when demand is inelastic, consumers are less responsive, so firms can pass on more tax.
B wrong: producers usually pay less of it when demand is inelastic.
C wrong: government receives tax revenue.
D wrong: foreign countries are not the main tax burden.
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Answer: B
A wrong: elastic demand means consumers reduce quantity strongly if price rises.
B correct: producers bear more of the tax because they cannot pass much on without losing sales.
C wrong: someone bears the tax burden.
D wrong: workers are not the direct incidence category here.
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Answer: A
A correct: environmental regulation may reduce pollution but raise firm costs and prices.
B wrong: fossil fuel subsidy may increase pollution and reduce price.
C wrong: maximum petrol price lowers price but may increase consumption.
D wrong: removing pollution controls may reduce costs but increase pollution.
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Answer: B
A wrong: intervention can fail or create inefficiency.
B correct: intervention can correct market failure but may cause shortages, surpluses, higher costs or government spending burdens.
C wrong: opportunity cost always remains.
D wrong: intervention can affect demand, supply, price and quantity.
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.