Which of the following policies is most likely to alter the allocation of resources away from disposable plastic cups? A: A subsidy paid to firms making pla...
Question 1 Report
Which of the following policies is most likely to alter the allocation of resources away from disposable plastic cups?
A: A subsidy paid to firms making plastic cups.
B: An indirect tax on plastic cups.
C: A decrease in the interest rate.
D: A reduction in income tax for all workers.
(a) Which policy is most likely to reduce plastic-cup production? [1]
(b) Explain how this policy could change the use of labour and capital in the economy. [3]
(c) Analyse why a subsidy for reusable-cup producers may be used alongside the tax. [5]
Answer Details
(a) An indirect tax on plastic cups is most likely to reduce plastic-cup production. [1]
(b) The tax raises firms' costs and the price of plastic cups. [1] Demand and production may fall. [1] Labour and capital can then move towards reusable cups or other more profitable products. [1]
(c) A subsidy lowers production costs for firms making reusable cups. [1] This can reduce their selling price. [1] More consumers may then switch away from plastic cups. [1] Reusable-cup producers have a stronger incentive to employ labour and capital in reusable products. [1] Used together, the tax discourages the polluting product while the subsidy encourages the alternative, reducing pollution. However, subsidies require government spending, which has an opportunity cost. [1]
Download The App On Google Playstore
Everything you need to excel in your exams
