1.3 Government Intervention Flashcards
Subsidy
An amount paid by the government to a firm per unit of output.
There are a number of reason why a government may give a subsidy for a product.
specific (indirect) tax
a fixed amount of tax that is imposed upon a product.
leads to a parallel curve shift
eg. a tax of $1 per unit.
percentage (indirect) tax
Like specific tax but it’s a percentage of the unit’s cost.
leads to non parallel no proportional curve shifts.
The relationship between the elasticity of D and S
The one that’s relatively more inelastic is more influenced by subsidies and taxes.
eg.: If D is more elastic than S, when subsidies are given, then the consumer benefits more than the producers do from the subsidy of the unit.
conversely, if it was tax, the consumers would pay more of the tax imposed on each unit of product.
Maximum (low) price controls
When the government sets a maximum price, below the equilibrium price, which then prevents producers from raising the price above it.
aka: “price ceiling”
Minimum (high) price controls
When the government sets a minimum price, above the equilibrium price, which prevents the producers from reducing the price below it.¨
aka. “price floor”
Price controls
Government’s act of setting maximum / minimum price for a product.
What do price ceilings cause?
Excess demand.
What do price floors cause?
Excess supply.
Reasons why the government might set maximum price
protect consumers where the product in question is seen as a necessity and or a merit good. eg. Food, water or access to rent for the poorer class.
To assure accessibility of necessary products that are required for the economy to keep going.
Methods the government can counter the excess supply caused by minimum (floor) price
Buy the surplus, destroy it or attempt to resell it abroad.
Though since this is expensive due to storage or wasteful the government can incentivize producers to not produce at all, by either paying the price they would have earned or by limiting quotas or by raising taxes
Two common reasons the government sets minimum (floor) prices
- Raise income for producers
2. Protect workers by minimum wage
Methods the government can counter the excess demand caused by maximum (ceiling) prices.
- Government could subsidize the producers.
- Government could produce themselves.
- Government has stored surplus, they can release.
Reasons the government would set maximum (ceiling) prices
Protect consumers’ (usually the poor) access to products that are considered necessities and or merit goods.
eg. Bread, basic stuff.
An undesired market that both minimum and maximum prices can cause overall
Black market
