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
