Chapter 15 Market Interventions Flashcards
The government imposes a tax per unit of good towards a given market. How does this effect aggregate surplus, producer surplus, consumer surplus?
The supply function will move up by the given amount of the tax and can be denoted by S_T. The new competitive market equilibrium can be found by equating the new supply function to the original demand function. Consumer and producer surplus will each fall and the sum of these losses will be greater than the government’s revenue from the tax. The difference is the deadweight loss.
How does a tax affect buyers and sellers?
The total amount buyers pay per unit will be raised and the total amount that sellers receive per unit will be lowered.
Why is there a deadweight loss associated to taxation?
Because some units for which buyer’s willingness to pay exceed the avoidable cost of production are not produced.
What is a subsidy?
A subsidy is a payment that reduces the amount that buyers pay for a good or increases the amount that sellers receive.
What is a price floor?
A price floor establishes a minimum price that sellers can charge.
What is a price support program?
It raises the market price by making purchases of the good, thereby increasing demand
What is a production quota?
It imposes limits on the quantity that individual firms can produce
What does a voluntary production reduction program do?
It offers firms inducements to reduce their production voluntarily
