Chapter 6 - Government Intervention Flashcards
What are the 3 reasons for government intervention?
- correcting market failures
- change the distribution of benefits
- encouraging or discouraging consumption of certain goods
What is a market failure?
situations in which the assumption of efficient, competitive markets fails to hold.
What is a price ceiling?
a maximum legal price at which a good can be sold
- to keep consumer costs low
what is a price floor?
a minimum legal price at which a good can be sold
- to protect producers income
Taxes (definition)
either the buyer or the seller must pay some extra amount to the government on top of the sale price
- discourage an activity or collect money to pay for its consequences
What are the effects of taxes on sellers?
- decreases supply
- does not affect demand
- equilibrium price rises and quantity decreases
- causes deadweight and redistributes surplus (government revenue)
What are the effects of taxes on buyers?
- does not affect supply curve
- affects the demand curve
- equilibrium price and quantity decrease
- causes deadweight and redistributes surplus
Identical effects on buyers and sellers as a result of taxes
- equilibrium quantity falls
- buyers pay more per unit purchased and sellers receive less
- tax wedge forms
- government receives revenue equal to the amount of the tax multiplied by the new equilibrium quantity
- tax causes a deadweight loss
What is a tax wedge?
the difference between the price paid by buyers and the price received by sellers
- equal to the amount of the tax
What is a tax incidence?
the relative tax burden borne by buyers and sellers
Subsidies (definition)
either the buyer or the seller receives a payment from the government that lowers the sale price
- to encourage an activity, to provide benefits to a certain group
Two main effects of subsidies
- encourages production and consumption of the good that is subsidized
- government provides money through the subsidy to producers who continue to sell the good
What is the effect of a subsidy on the sellers?
- increases supply
- does not affect demand
- equilibrium price decreases and quantity increases
- increases total surplus within the market, but imposes a cost on the government
What is the effect of a subsidy on the buyers?
- increases demand
- does not affect supply
- equilibrium price decreases and quantity increases
- increases total surplus within the market
Short run
effect on quantity is small
