Chapter 4 Vocab Flashcards
Why does the gov intervene in the markets?
earn money from taxes (indirect), to provide support and influence production of private firms, provide support for low income households, promote equity, correct market failure, and influence levels of consumption.
What are the forms of gov intervention?
price controls (ceilings and floors), indirect taxes, subsidies, command and control, consumer nudges, direct provision of services
Command and Control
The regulations and provisions set by the government that everyone must follow.
Price control
the setting of by the government (or private organizations) of minimum or maximum prices so that prices can’t adjust to their equilibrium level determined by supply and demand. In return this creates shortages or surpluses
Price ceiling
A price ceiling is a maximum price that can be set for a good or service that is below the equilibrium price to make the good more affordable.
Welfare loss
social surplus that is lost to society because resources were not allocated efficiently
Price Floor
A price floor is a minimum price that can be set for a good or service in order to increase support for farmers and increase the wage of low income workers. It is always set above the equilibrium price to increase the price of a good or service.
Price Floor welfare loss
a price floor creates welfare loss, which tells us that price floors create allocative inefficiency due to overallocation of resources for the production of a good
Indirect taxes
taxes imposed on buying goods or services. Differ from direct taxes (income taxes)
why do governments impose indirect taxes
source of government income, an indirect method of discouraging consumption of certain goods or services, can be used to redistribute income, method to improve the allocation of resources.
specific taxes
a fixed tax amount per unit sold
Ad valorem taxes
a fixed percentage of goods or services sold
Subsidy
An amount of money paid to a firm by the government to: prevent an industry from failing, to support producers’ incomes, and as a form of protection against imports
Why are subsidies granted?
to increase revenue, to make certain goods more affordable for lower income households, to encourage production of certain goods or services, to support growth of certain industries, to encourage exports of a certain group, a method to improve allocation of resources
