Chapter 6 - Government Intervention Flashcards
Market failures
Situations in which the assumption of efficient, competitive markets fails to hold
Price control
A regulation that sets a max/min legal price for a particular good
Price ceiling
A regulation that sets a max legal price at which a good can be sold
Deadweight loss
A loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity
Price floor
A minimum legal price at which a good be sold
Tax wedge
The difference between the price paid by buyers and the price received by sellers in the presences of a tax (equals the amount of tax)
Tax incidence
The relative tax burden borne by buyers and sellers
Subsidy
A requirement that the government pay an extra amount to producers or consumers
Three reasons to intervene:
Changing the distribution of surplus, encouraging or discouraging consumption of certain goods, and correcting market failures
The two primary effects of taxes are:
- Raising government revenue
- Discouraging consumption
When tax is imposed on sellers
Demand stays the same
