Government Interventation Flashcards
Why do governments intervene in markets
Earn revenue, to support firms, support low income earning households
Price controls
Setting a minimum or maximum price by the government so that prices can’t adjust to their normal equilibrium level determined by supply and demand
Market disequilibrium
Market is prevented from reaching clearing price and there are shortages of surpluses
Price ceilings
When the government sets a legal maximum price for a particular good
Consequences of price floors and explain each
Shortages, non-price rationing, underground markets, welfare loss
Consequences of price ceilings on consumers (stakeholders)
Consumers gain and lose. Coz bought at less but the good is less in quantity
Consequences of price ceilings on producer stakeholders
Worse off. Less quantity, less money
Consequences of price ceilings on worker stakeholders
Unemployment
Examples of price ceilings
Rent controls, food price controls
Price floor
This is setting a legal minimum price below price equilibrium
Why governments set price floors
Support firms, to protect low-skillled labour
Consequences of price floors
Surplus, firm inefficiency, over allocation of resources, government has to dispose of surplus
Consequences of price floors to consumers (stakeholders)
Pay higher price while getting less quantity
Consequences of price floors to producers (stakeholders)
Get more money coz govt buys surplus, produces more but misallocation or waste of resources
Consequences of price floors to workers (stakeholders)
Employment
Consequences of price floors to governments (stakeholders)
They buy surplus and it’s a burden on the budget
How to calculate consumer expenditure (PF)
Before PF; Pe x Qe
After PF; PF x Qd
How to calculate producer revenue (PF)
Before PF; Pe x Oe
After PF; PF x Qs
How to calculate government expenditure (PF)
PF x Consumer Surplus(Qs - Qd)
How to calculate change in consumer surplus (PF)
B4 PF: Max - Pe x Qe divided by 2
After PF: Max - PF x Qd divided by 2
How to calculate change in producer surplus (PF)
Before PF: Pe - lowest x Pe divided by 2
After Pf: PF - lowest x Qs divided 2
How to calculate welfare loss (PF)
Rectangle minus f(triangle)
Minimum wage
This is the legal minimum amount that can be paid to workers
Consequences of minimum wage on the economy at large (explain each)
Labour surplus leading to unemployment
Illegal workers below minimum wage
Miss allocation of resources
Consequences of minimum wage for stakeholders
Firms pay more
Workers earn more but could loss jobs
Consumers get less supply of goods at higher prices
Indirect tax
These are taxes imposed on producers by the government but are pushed to another group usually consumers
Two types of indirect tax
Excise tax (imposed on particular goods eg petrol
Taxes on all goods and services
Why do governments impose indirect tax
To reduce consumption of demerit goods
Source of government revenue
To redistribute income
Consequences of indirect tax to stakeholders
Consumers pay more for less quantity
Producers earn less and produce less
Governments earn
How to calculate consumer expenditure after indirect tax
Before tax; Pe x Qe
After tax; Pc x Qt
The subtract before - after
How to calculate producer revenue after indirect tax
Before tax; Pe x Qe
After tax; Pp x Qt
Then subtract
How to calculate government spending after indirect tax
First find the tax which is PC - PP = tax
Then T x QT
How to calculate welfare loss after indirect tax
Consumer surplus before tax plus producer surplus before tax minus consumer surplus after tax plus producer surplus after tax
Subsidy
This is assistance by the government to individuals eg firms in form of direct cash or low interest rates
Reasons why the government gives subsidies
To help start up businesses
To make certain goods affordable for consumers esp food or meds
To increase employment
Consequences of subsidies to stakeholders
Consumers pay less for more quantity
However it’s tax payers money that could be spent better so opportunity cost
Producer produce more earn more
Government it’s a burden on budget
Convulsing effects of subsidies
It’s the same thing(think)
Draw all graphs
🙂
