IB Government in microeconomics Flashcards
Define dead weight loss/welfare loss (2)
failure to reach allocative efficiency
not producing at equilibrium
Possible reasons for government intervention (7)
to earn government revenue
to support firms
to support low income households
to influence production level
to influence consumption level
to correct market failure
to promote equity/equality
Government revenue as a reason for government intervention (3)
revenue from indirect taxes on goods/services
lower PED of good = greater amount of tax revenue
funding government projects + budgets
Supporting firms as a reason for government intervention (5)
may be for economic, political, strategic reasons
small firms which require financial assistance to compete with larger firms
supporting firms in industry gov. wants to promote
offering subsidies + price flows
protecting domestic firms from foreign (trade protection, tariff, quota)
Supporting low income households as a reason for government intervention (2)
improve quality of life for all citizens
using subsidies, price ceilings, direct provision of services (education + healthcare),
Influence levels of production as a reason for government intervention (2)
subsidies, price floor, trade protection to increase production
indirect taxes on industries/products they want to diminish
Influence level of consumption as a reason for government intervention (2)
may increase consumption of goods/services that are beneficial (merit good)
may diminish consumption by adding indirect tax on demerit goods
increase consumption through : direct provision, subsidies, nudges, law + regulation,
Define market failure (2)
inefficient allocation of resources
market failure = market is producing too litte/much goods/services in relation to how much society prefers
Equity/equality as a reason for government intervention
improve equity of income distribution
Define price control (3)
setting minimum or maximum price by government
prices unable to adjust to market equilibrium
result in market disequilibrium (surplus or shortage)
Define price ceilings (2)
government set maximum price of good/service which is below equilibrium price
e.g affordable housing, low-cost food
Reasons for price ceiling
make certain goods more affordable to low income groups
Consequences of price ceilings (5)
creates shortages
rationing
promotes creation of black markets (illegal)
eliminates allocative efficiency
creates welfare/deadweight loss
Price ceiling shortage
not all interested buyers willing/able to buy good
Price ceiling rationing (3)
dividing good amongst possible consumers
free market rationing - good given to those willing/able to pay for it
price mechanism no longer achieves rationing function during shortage
Non-price rationing (3)
first come first serve
distribution of coupons
favoritism - seller can sell good to preferred customer
Price ceiling black markets (2)
unrecorded buying and selling which is usually illegal
involves buying good at maximum legal price then reselling at a higher price
Eliminates allocative efficiency
Consequences of price ceilings for consumers
shortage - some consumers unsatisfied as there are not enough of the good
Consequences of price ceilings for producers (2)
producers worse off - sell smaller quantity of good at lower price
revenue drops from Pe x Qe to P x Qs
Consequences of price ceilings for workers
fall in output Qe to Qs –> workers likely to be laid off –> unemployment
Consequences of price ceilings for government
may gain political popularity among consumers who are better off due to price ceiling
Solution to problems of price ceilings (7)
increase supply through subsidies to consumers
tax breaks to lower production costs
investments in infrastructure
research + development - technological advancements
improve labor supply + skills - inrease productivity
reduce regulation - make it easier to produce
encourage foreign investment
Consumer/Producer expenditure
price per unit of good x no. of goods purchased
Define price floor (2)
governments setting a minimum price of a good/service higher than equilibrium
producers must charge higher than the price floor
Reasons for price floors (2)
protect producers that could be in danger
protect workers (minimum wage)
Consequences of price floors (4)
Surpluses - government needs to dispose of surplus
firm inefficiency
allocative inefficiency
welfare loss
Government measures to dispose of subsidies as a consequence of price floors (3)
gov. makes decision about what to do with excess surplus bought
storing excess surplus
exporting surplus - sometimes needs subsidy to compete with foreign goods
Firm inefficiency as a consequence of price floors (2)
no competition - gov. buying excess surplus
no incentive to reduce costs + increase productivity + research
Market inefficiency as a consequence of price floors
overallocation of resources due to increased quantity supplied due to price increase
Welfare loss as a consequence of price floors
Calculating how much gov. will spend on surplus for price floor
Price floor(Qs - Qd)
Consequence of price floors for consumers (2)
must pay higher price
loss of consumer surplus
Consequences of price floors for producers (4)
receive higher price to sell goods
gov. buys up surplus = more revenue
producers protected from low-cost production
no incentives to become more efficient
Consequences of price floors for workers
increase employment due to greater production of goods
Consequences of price floors for government (3)
opportunity cost - buy excess supply
cost money to store surplus
subsidise for export
Consequences of price floors for other countries (4)
surplus exported at lower prices to maintain competition
other countries will dump in order to retain competition
lower prices will cause producers to lower production
misallocation of resources
Purpose of minimum wage
guarantee adequate income to low-income workers (mostly unskilled)
Demand for labour curve
shows QTY of labour firms willing/able to hire at each wage
Supply of labour curve
shows QTY of labour workers supply at each wage
Consequences of minimum wage (4)
creates labour surplus - unemployment
illegal workers (immigrants) at wages below min. wage
misallocation of labour resources - prevents equilibrium price of labour
misallocation of product market - increases firms production costs + reduces supply
Reasons why government intervention exists in agricultural markets (3)
food security - promote (a degree of) self-sufficiency in food production
protect farmer incomes from low+volatile prices
ensue affordable food for consumers
