Module M09 Quiz: Price Regulation, Taxes, and Subsidies
25 questions · Introductory · Mix of multiple choice, calculation, and short answer
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Attempt each question before clicking Show Answer. For calculation questions, write out your working first.
Question 1
Lesson L01 · Supply Demand
A price ceiling set BELOW the market equilibrium price will cause:
Type: Multiple Choice
- A) A surplus
- B) A shortage
- C) No change in quantity
- D) An increase in supply
Show Answer
Answer: B) A shortage
A binding price ceiling prevents the price from rising to equilibrium — quantity demanded exceeds quantity supplied, creating a persistent shortage.
Question 2
Lesson L01 · Supply Demand
Sydney rent control sets maximum rent at $400/wk when equilibrium is $600/wk. If demand is QD=1000-Q×(1/2) and supply QS=Q×(1/2), calculate the shortage at $400.
Type: Calculation
Show Answer
Answer: 400 units
QD at $400: 1000-(400/2)=800. QS at $400: 400/2=200. Shortage=800-200=600. (Exact answer depends on parameterisation; key insight is QD>QS.)
Question 3
Lesson L01 · Supply Demand
Who benefits from rent control and who is harmed?
Type: Short Answer
Show Answer
Answer: Existing tenants who keep their rent-controlled apartments benefit from lower rents. New entrants (e.g. young workers, migrants) are harmed because fewer units are available and landlords may allocate by non-price means (connections, discrimination).
Rent control redistributes from landlords and would-be tenants to existing tenants.
Question 4
Lesson L01 · Supply Demand
A price ceiling causes a persistent shortage. What non-price allocation mechanisms might emerge?
Type: Multiple Choice
- A) The price rises to equilibrium
- B) Queuing, rationing, black markets, and allocation by seller preference
- C) Supply increases to meet demand
- D) The good disappears from the market entirely
Show Answer
Answer: B) Queuing, rationing, black markets, and allocation by seller preference
When prices can't ration, other mechanisms emerge: queues, waiting lists, black markets, or allocating to preferred customers.
Question 5
Lesson L01 · Supply Demand
In the long run a price ceiling is likely to cause even greater housing shortages than in the short run because:
Type: Multiple Choice
- A) More people move to the city
- B) Supply is more elastic in the long run — landlords convert properties to other uses or reduce maintenance reducing housing stock
- C) Demand falls over time
- D) The ceiling is adjusted for inflation
Show Answer
Answer: B) Supply is more elastic in the long run — landlords convert properties to other uses or reduce maintenance reducing housing stock
Long-run supply is more elastic: landlords exit the market, convert to commercial use, or let quality deteriorate — shrinking supply further.
Question 6
Lesson L02 · Supply Demand
Australia's minimum wage is set by:
Type: Multiple Choice
- A) The RBA
- B) The Fair Work Commission
- C) Individual enterprise agreements only
- D) The ACCC
Show Answer
Answer: B) The Fair Work Commission
Australia's National Minimum Wage is set annually by the Fair Work Commission through a wage review process.
Question 7
Lesson L02 · Supply Demand
A minimum wage of $25/hr is set above the competitive equilibrium of $20/hr. Using a labour demand/supply diagram, what is the effect on employment?
Type: Multiple Choice
- A) Employment rises
- B) Employment falls — labour demand decreases and labour supply increases creating a surplus of labour (unemployment)
- C) Employment is unchanged
- D) Wages rise further
Show Answer
Answer: B) Employment falls — labour demand decreases and labour supply increases creating a surplus of labour (unemployment)
A binding wage floor creates excess supply of labour (unemployment): firms demand less labour at the higher wage while more workers seek employment.
Question 8
Lesson L02 · Supply Demand
If labour demand is LD=1000-20W and supply is LS=200+10W, calculate the competitive equilibrium wage and employment.
Type: Calculation
Show Answer
Answer: W*=$26.67, L*=467
LD=LS: 1000-20W=200+10W → 800=30W → W=$26.67; L=1000-20(26.67)≈467
Question 9
Lesson L02 · Supply Demand
Why might a minimum wage cause less unemployment than standard supply-demand analysis predicts when employers have monopsony power?
Type: Short Answer
Show Answer
Answer: A monopsonist pays below the competitive wage and hires fewer workers. A minimum wage up to the competitive level can actually increase both wages and employment by counteracting monopsony power.
With monopsony, the competitive wage floor raises wages without necessarily reducing employment.
Question 10
Lesson L02 · Supply Demand
Agricultural price support in Australia historically set a floor price for wheat above equilibrium. What problem did this create?
Type: Multiple Choice
- A) Wheat shortages
- B) Wheat surpluses requiring government stockpiling or export subsidies
- C) Lower wheat prices
- D) Increased competition from imports
Show Answer
Answer: B) Wheat surpluses requiring government stockpiling or export subsidies
A price floor above equilibrium creates a surplus — producers supply more than consumers demand at the supported price.
Question 11
Lesson L03 · Supply Demand
If demand is perfectly inelastic and supply is elastic, who bears the entire burden of a tax?
Type: Multiple Choice
- A) Producers
- B) Consumers
- C) Split equally
- D) Government
Show Answer
Answer: B) Consumers
When demand is perfectly inelastic, consumers pay the same quantity regardless of price — the entire tax is passed on to consumers.
Question 12
Lesson L03 · Supply Demand
Australia's fuel excise is approximately 49.6 cents per litre. If petrol demand elasticity is -0.25 and supply is elastic, roughly what share of the excise do consumers pay?
Type: Calculation
Show Answer
Answer: ~80%
With inelastic demand (|PED|=0.25) consumers bear the larger share. Share borne by consumers ≈ Es/(Es+|Ed|) ≈ large/large+0.25 ≈ ~80% (with elastic supply).
Question 13
Lesson L03 · Supply Demand
A per-unit tax of $T causes deadweight loss because:
Type: Short Answer
Show Answer
Answer: The tax creates a wedge between the price consumers pay and producers receive, reducing quantity below the efficient level. Units that would have created positive surplus (WTP>MC) are not traded.
The tax distorts the quantity decision away from the efficient level where supply meets demand.
Question 14
Lesson L03 · Supply Demand
A tax on cigarettes in Australia raises $12bn/year. If quantity sold falls 15% after the tax, is this consistent with the goal of reducing smoking or maximising revenue?
Type: Multiple Choice
- A) Only maximising revenue
- B) Only reducing smoking
- C) Consistent with both — significant revenue is raised while consumption falls
- D) Neither goal is met
Show Answer
Answer: C) Consistent with both — significant revenue is raised while consumption falls
A well-designed tobacco tax achieves both: raises revenue and reduces smoking. Australia's tobacco tax is explicitly designed for health and revenue objectives.
Question 15
Lesson L03 · Supply Demand
Who bears more of a tax burden: the side with more elastic demand/supply or the side with less elastic demand/supply?
Type: Multiple Choice
- A) More elastic side
- B) Less elastic side — tax burden falls on whichever side can less easily adjust quantity
- C) Equally on both sides
- D) Always the consumer
Show Answer
Answer: B) Less elastic side — tax burden falls on whichever side can less easily adjust quantity
The less elastic side has fewer alternatives and cannot easily reduce quantity — they absorb more of the price change from the tax.
Question 16
Lesson L04 · Supply Demand
A per-unit subsidy shifts the supply curve:
Type: Multiple Choice
- A) Upward by the subsidy amount
- B) Downward by the subsidy amount (rightward shift)
- C) Has no effect on supply
- D) Increases consumer price
Show Answer
Answer: B) Downward by the subsidy amount (rightward shift)
A subsidy reduces the effective cost of production by the subsidy amount, shifting supply right (down) — producers supply more at each price.
Question 17
Lesson L04 · Supply Demand
Australia's childcare subsidy reduces the price parents pay. A subsidy of $50/day is introduced. If market price was $120/day and demand elasticity is -0.8, estimate the consumer price reduction.
Type: Calculation
Show Answer
Answer: ~$28
With elastic demand, consumers capture more of the subsidy. Consumer price falls by roughly subsidy × (Es/(Es+|Ed|)). Assuming Es=1.5: \(50×(1.5/2.3)≈\)33. Approximate answer in range \(25-\)35.
Question 18
Lesson L04 · Supply Demand
Why does a subsidy create a deadweight loss even though it benefits both buyers and sellers?
Type: Short Answer
Show Answer
Answer: A subsidy encourages overproduction — units are produced where the social cost (supply price) exceeds the social benefit (demand price). The government pays for units that create less value than they cost.
Subsidies push output beyond the efficient level, wasting resources on low-value production.
Question 19
Lesson L04 · Supply Demand
Australia's Renewable Energy Target subsidised solar power. From an economic efficiency perspective this is justified if:
Type: Multiple Choice
- A) Solar firms are profitable
- B) Solar power has positive externalities (reduced emissions) so the social benefit exceeds the private benefit — a subsidy corrects the externality
- C) The government wants to support manufacturing
- D) Energy prices are too high
Show Answer
Answer: B) Solar power has positive externalities (reduced emissions) so the social benefit exceeds the private benefit — a subsidy corrects the externality
Subsidising positive externalities (clean energy) corrects market underproduction — the private market undersupplies because it ignores the social benefit of lower emissions.
Question 20
Lesson L04 · Supply Demand
The cost to government of a per-unit subsidy equals:
Type: Multiple Choice
- A) The change in consumer surplus
- B) Subsidy amount × quantity sold after subsidy
- C) The deadweight loss only
- D) Producer surplus gain only
Show Answer
Answer: B) Subsidy amount × quantity sold after subsidy
Government cost = subsidy per unit × equilibrium quantity after subsidy. This is greater than the net welfare gain because some goes to DWL.
Question 21
Lesson L05 · Externalities
Australia's carbon price (2012-14) was set at $23/tonne of CO2. This is an example of:
Type: Multiple Choice
- A) A price floor
- B) A Pigouvian tax
- C) A production quota
- D) A subsidy
Show Answer
Answer: B) A Pigouvian tax
A carbon price is a Pigouvian tax designed to make emitters pay the social cost of carbon, internalising the negative externality.
Question 22
Lesson L05 · Externalities
The Safeguard Mechanism (2023) requires large emitters to reduce emissions intensity or purchase offsets. This is closer to:
Type: Multiple Choice
- A) A Pigouvian tax
- B) A tradeable permit scheme
- C) A command-and-control regulation with trading
- D) A price subsidy
Show Answer
Answer: C) A command-and-control regulation with trading
The Safeguard Mechanism sets limits (command) but allows trading of offsets (permit-like flexibility) — a hybrid instrument.
Question 23
Lesson L05 · Supply Demand
Australia's fuel excise is 49.6c/L. If a car uses 8L/100km and drives 15,000km/year, calculate annual fuel excise paid.
Type: Calculation
Show Answer
Answer: $595.20
Fuel used = 0.08×15,000=1,200L. Excise = 1,200×\(0.496=\)595.20
Question 24
Lesson L05 · Externalities
Compare the efficiency of a carbon tax vs a command-and-control emissions standard.
Type: Short Answer
Show Answer
Answer: A carbon tax lets firms reduce emissions where it is cheapest, achieving a given emissions reduction at minimum cost (cost-effective). A uniform standard forces all firms to meet the same target regardless of their abatement costs, which is usually more expensive in aggregate.
Taxes achieve environmental goals cost-effectively; standards may not equate marginal abatement costs across firms.
Question 25
Lesson L05 · Supply Demand
Rent Assistance is a Commonwealth payment to low-income renters. How does this differ from rent control?
Type: Multiple Choice
- A) Both are price ceilings
- B) Rent Assistance is a demand-side subsidy that raises renters' effective purchasing power without distorting the rental market price; rent control is a supply-side price ceiling that creates shortages
- C) Rent Assistance reduces supply of rental housing
- D) They are identical in economic effect
Show Answer
Answer: B) Rent Assistance is a demand-side subsidy that raises renters' effective purchasing power without distorting the rental market price; rent control is a supply-side price ceiling that creates shortages
Rent Assistance increases demand-side affordability while leaving market prices intact. Rent control caps prices and creates shortages — very different economic effects.