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(d) Using information from the text and your knowledge of economics, evaluate the intervention you outlined in (c)

(d) Using information from the text and your knowledge of economics, evaluate the intervention you outlined in (c)

The government’s solution of placing a tax on the production of goods that cause an emission of CO2 has both good and bad part. The advantages of placing tax on the production are firstly, it would reduce the total amount of CO2 emission, which will eventually improve the environment. Also, it will also effect the employment rate. When the government places tax on the production, the companies may have to shut down due to the decrease number of employment. It decreases supply since indirect tax is one of the determinants of supply. Government can impose indirect tax on goods with negative externalities of production. this is because indirect tax is considered as a cost of production. As the cost of production increases, supply decreases. Placing tax on the production of goods also effects the consumers. Imposing indirect tax on goods with negative externalities of consumption can effect other market, which do not relate to the negative externalities of production. Basically, the government is decision maker. They will both gain and lose, which depends on the outcome. Even though the tax helps the environment, it would also effect the level of production or the increase in unemployment rate.


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Explain the differences between merit goods, demerit goods and public goods

Public goods

  • Public goods are ones that when consumed by one person can be consumed in equal amounts by the remainder of society
  • Examples are National defense, the police service, street lighting, light houses and more
  • 2 properties: non-rivalry and non-excludability
  • Non rivalry: One person’s use of the public good does not deprive any other person of such use or does not diminish the amount available to others
  • Non excludability: When the public good is provided to one person, it is not possible to prevent others from enjoying its consumption
  • market will under-produce such goods or not produce them at all

Merit goods

  • Deemed to be socially desirable
  • Likely to be under-produced and under-consumed
  • Not necessarily in sufficient quantities to maximize social welfare
  • Benefit: Individual and communal (strong positive externalities)
  • Diagram:

  • Provided by Government
  • Financed by Taxation
  • Examples: Health, Education, Housing

Demerit goods

  • Over produced and over consumed
  • Negative externalities
  • Diagram: Price = social marginal cost = social marginal benefit.

    • Examples are cigarettes, alcohol and addictive drugs
    • Consumption of demerit goods imposes considerable negative externalities on society as a whole

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    Market Failure

    Positive Externality

    Negative Externality

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    What I’ve leant about the “explain” question

    What I’ve learnt about the “explain” question is that I need to identify the command terms and explain the basic facts about the question. Also, I need to start off my essay by referring my answer to the question and state my opinion clearly.

    For this explain question, the time is very important. I only get 20 minutes of reading and writing time so I need to plan what to write efficiently.

    Also, I need to recap what I’ve learnt earlier to make sure I understand everything and ready to answer.

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    Explain the law of diminishing returns using average and marginal product curves

    Demands of the question

    1. 10 marks (paper 2)
    2. 20 minutes on it
    3. Explain the law of diminishing returns using average and marginal product curves


    1. Law of diminishing returns refer to how the marginal production of a factor of production starts to progressively decrease as the factor is increased, in contrast to the increase that would otherwise be normally expected.

    Triple A

    Law of diminishing returns – as more and more of a variable factor is added to a fixed factor, output will rise initially but will eventually fall.

    Initially, in region 0 – A, there are increasing returns. In the zone A – B there are decreasing returns, and beyond B there are negative returns.

    This theory supports the shape of the marginal and average cost curves. Both of these curves will be u-shaped as eventually diminishing returns will lead to costs increasing. Initially increasing returns mean that both AC and MC will fall, but once diminishing returns set in both curves start to rise again.

    The marginal cost curve will intersect the average cost curve at its minimum point.

    The actual position of the AC curve will vary with a number of factors.

    • Costs of factor inputs (labour, materials, services etc). The cheaper the inputs the lower the average cost will be at any given output.
    • Productivity – productivity can be defined as output per unit input. The more productive the firm, the more output it gets from its inputs and the lower the average cost at any output.

    Productivity is measured in a number of ways:

    • Marginal product (MP) – the change in total output resulting from the adding of one extra unit of a variable factor, often labour.
    • Average product (AP) – total output / units of variable factor being used.

    The choice of factor inputs will be driven by their costs, productivity and effect on product cost. An efficient firm will make its choices so as to minimise its average cost at the production rate being worked. Look at the following example.

    Sum up the main idea

    The essence of this explanation is that the supply price that sellers are willing and able to receive for a good depends on the production cost. If the production cost increases, then the sellers need a higher supply price. Because the marginal product of a variable input declines with greater production, more of the variable input is needed, which increases production cost.

    The law of diminishing marginal returns is reflected in the shapes and slopes of the total product, marginal product, and average product curves. The most important of these being the negative slope of the marginal product curve.

    Powerpoint slides


    The average product typically varies as more of the input is employed, so this relationship can also be expressed as a chart or as a graph. A typical average physical product curve is shown (APP). It can be obtained by drawing a vector from the origin to various points on the total product curve and plotting the slopes of these vectors.

    Because the marginal product drives changes in the average product, we know that when the average physical product is falling, the marginal physical product must be less than the average. Likewise, when the average physical product is rising, it must be due to a marginal physical product greater than the average. For this reason, the marginal physical product curve must intersect the maximum point on the average physical product curve.

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    Possible Theory of the Firm Questions (via Tyler’s Economics Blog)

    Monday 8 May 2006 Paper 2: "Using appropriate diagrams, discuss whether monopoly is more efficient or less efficient than perfect competition." Tuesday 7 November 2006 "Explain the necessary conditions for price discrimination to take place. "Discuss the advantages and disadvantages of price discrimination for consumers and producers." Tuesday 7 November 2006 Paper 2: "A monopoly firm decides to maximize revenue rather than profit. Use a diagram … Read More

    via Tyler's Economics Blog

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