government in microeconomics Flashcards
in what ways does the government intervine
Price controls
Indirect taxes
Subsidies
Direct provision of services
Command and control regulation and legislation
Consumer nudges
why does the government intervine
To earn government revenue
To support firms
To support households on low incomes
To influence the level of production
To influence the level of consumption
To correct market failure
To promote equity
explain earning government revenue
firms impose indirect taxes, especially on goods that have the low elasticity of demand, so they can profit and earn higher government revenue, which they can use to provide public goods and services, invest in infrastructure, improve education, etc.
explain supporting firms
government can do this for economic, political or strategic reasons, they impose subsidies to help firms and industries that they need to improve, such as farming industry
explain supporting households on low incomes
an example with Indonesia imposing fuel subsidies to help low income households afford gas
explain influencing the level of production
they try to decrease the level of productions of goods that are generally bad for the society, like fossil fuels that negatively impact climate change
explain influencing the level of consumption
government does this with demerit goods witch negatively impact consumers, like tobacco, by increasing indirect taxes and imposing age restrictions, bans on tobacco advertising and smoking bans
explain correcting market failure
an example of climate change and how the government acts to improve the transparency and availability to consumers about the goods harmful for the environment, as well as to increase indirect taxes on those goods
explain promoting equity
most common i health care and educations because those are considered to be basic human rights
price ceilings
the maximum price of a necessity or merit good imposed by the government to ensure that low income consumers are able to afford them, such as food and housing, setting a price lower than the equilibrium to ensure that it won’t become higher than the equilibrium
the aims of the price ceilings
increase consumption of the good or service.
reduce the price of certain goods or services for low-income consumers.
prevent exploitation by monopolies
the affect of price ceilings on the supply
The price has been reduced but only for those who get to consume the good. The amount consumed has not increased because of the maximum price, it has actually now fallen.
Possible consequences of imposing a maximum price
It produces shortages.
It generates a rationing problem.
It promotes the creation of parallel (black) markets.
It eliminates allocative efficiency and generates welfare loss.
There are consequences for market stakeholders.
explain the production of shortages
the increase in the price of a good makes firm produce less of that good, so not all of the consumers who are willing and able to buy a certain good get to do so, so the shortages in supply are created
how to calculate the shortages
it is not an area, but a distance on the axis of the graph between the Q demanded and the Q supplied at the set pricew
explain the generation of a rationing problem for price ceilings
who gets to get a good if there is a shortage? methods: queueing, first-come-first served basis, coupons
explain the promotion of creation of the black market for price ceilings
in one hand, consumers who would be willing and able to pay at a higher price don’t get to because of the shortages, and in the other hand, producers earn less revenue because they don’t get to sell their goods at the higher price, so they tend to participate in the parallel market
explain the elimination of allocative efficiency and the generation of welfare loss for price ceilings
explain how we lose b + d as a welfare loss using the praph
solutions to maximum price control policies
shifting the supply curve by the value of excess demand by:
1) subsidies to producers
2) increase supply
3) store the non-perishable product before imposing the ceiling
minimum price controls
Price floors are minimum prices set by the government that are set above the equilibrium price.
the aims of price floors
to increase the income of producers of goods and services that the government considers important and to protect workers, by setting a minimum wage that ensures they earn enough to have a reasonable standard of living
consequences of imposing a minimum price
It produces surpluses.
It promotes the creation of black markets.
The government needs to dispose of the surplus.
It might create firm inefficiency.
It eliminates allocative efficiency and generates welfare loss.
There are consequences for market stakeholders.
explains surpluses for price floors
surplus Q2-Q1 is created, so more goods are supplied that demanded
black markets for price floors
producers will try to illegally se sell the product at the lower price than the Pmin
explain that the government must dispose of the surplus for price floors
the government can purchase the excess supply, shifting the demand curve outwards and moving quantity from Q1 to Q2
what can government do with purchased excess supply
1) store the good
2) export the good
3) donate good to a developing country
4) burn the good
(disadvantages for every one of those)
explain firm inefficiency for price floors
if firms know that they will receive a higher price anyways, they might stop caring about using the efficient and sustainable methods to produce their goods
explain allocative inefficiency and welfare loss for price floors
explain with the graph; without government purchases the deadweight loss is c + e, and with them it’s the shaded area on the second graph, where D2 is shifted outwards and it is equal to D1 + government purchases
calculate the total revenue
total TR= TR2 - TR1 (TR1=P1 x Q1 and TR2=P2 x Q2)
calculate consumers expenditure
CE = CE2 - CE1 (CE1= P1 x Q1 and CE2=P2 x Q before the Q1)
calculate government’s expenditure on surpluses for price floors
Pmin x the amount of surplus
the aims of indirect taxes
collect government revenue.
discourage consumption of undesirable and/or dangerous goods.
redistribute income within the population.
correct negative externalities and socially inefficient allocation of resources
excise taxes
taxes to discourage the consumption of particular goods, such as tobacco, petrol and alcohol
types of excise taxes
specific tax (parallel shift in S curve) and percentage tax (non parallel shift in S curve)
the relationship between marginal social cost and marginal social benefit with indirect taxes
MSB>MSC
aims of subsidies for the government
to increase revenues of producers.
to make basic necessities and merit goods more affordable to low-income consumers.
to encourage the consumption of a good or service that is considered beneficial to consumers.
to support growth of a particular industry.
to encourage exports and protect national industry from foreign competition.
to correct positive externalities, improving the allocation of resources
explain the effect of subsidies on the market
the supply curve shifts downwards by the amount of subsidy per unit, so equilibrium price shifts so that it fits lower price and higher quantity
calculate the cost of subsidy
(Pp - Pc) x Qsb
effect of subsidies on a society as a whole
society is worse off, because there is an over-allocation of resources to the production of the subsidised good and the higher price received by producers allows relatively inefficient producers to keep producing as they are protected by the subsidy; distorts market equilibrium
How do we manage global fish stocks
Using fish quotas, banning fishing methods, managing marine conservation areas
Consumer nudges
use gentle reinforcement and suggestion to influence market participants towards the desired bihaviour
principles of nudges
easy, attractive, social, timely
Examples of consumer nudges
Only placing healthy snacks at checkouts instead of junk food
Plastic carrier bag charges
Bottle deposit schemes
Making organ donation an opt-out scheme rather than having to choose to opt-in
Placing a target or image in the bowl of men’s urinals to improve hygiene
Methods of consumer nudges
Providing information
Changing the environment
Using social norms
advantages of consumer nudges
inexpensive ways to help consumers make a right choice more easily
