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Economics > Micro – Intervention > Flashcards

Micro – Intervention Flashcards

1
Q

Why do Governments intervene in the Market?

A
  • Earn government revenue
  • Support firms
  • Support low-income families
  • Influence consumption of goods
  • Influence production of goods
  • Correct market failure
  • Promote equity
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2
Q

What are the types of Intervention a Government can Implement?

A

1) Subsidies
2) Price Controls
3) Taxes
4) Nudges
5) Regulation and legislation
6) Direct provision of goods/serices

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3
Q

What are Price Controls?

A

Setting of minimum or maximum prices by the government so that prices are unable to adjust to the equilibrium level determined by the forces of demand and supply.

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4
Q

What is a Price Ceiling?

A

A maximum price set below the equilibrium price in order to make goods more affordable to low income consumers.

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5
Q

Explain the consequences of Price Ceilings to Stakeholders

A 
Consumers: some are worse off, some better off
Producers: worse off
Workers: worse off
Government: unaffected
Society: worse off
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6
Q

What are the consequences of Price Ceilings on the Market?

A
  • Shortage (excess demand)
  • Non-price rationing
  • Parallel markets
  • Underallocation of resources (inefficiency)
  • Welfare loss
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7
Q

What happens to Producer, Consumer and Social Surplus after a Price Ceiling?

A

Producer Surplus: decreases
Consumer Surplus: increases
Social Surplus: decreases (creation of welfare loss)

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8
Q

What are some examples of Price Ceilings?

A
  • Rent controls

* Food price controls

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9
Q

What is a Price Floor?

A

A minimum price set above equilibrium line to protect low income producers/workers.

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10
Q

Explain the consequences of Price Floors on Stakeholders

A 
Consumers: worse off
Producers: better off
Workers: better off
Government: worse off
Society: worse off
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11
Q

What are the consequences of Price Floors on the Market?

A
  • Surplus (excess supply)
  • Overallocation of resources (inefficiency)
  • Firm inefficiency
  • Disposal of surplus
  • Welfare loss
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12
Q

What happens to Producer, Consumer and Social Surplus after a Price Floor?

A

Producer surplus: increases
Consumer surplus: decreases
Social surplus: decreases (creation of welfare loss)

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13
Q

What is an example of a Price Floor?

A

Minimum wage

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14
Q

What are the consequences of the Minimum Wage on Stakeholders?

A

Consumers: worse off
Producers: worse off
Workers: better off
Government: worse off

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15
Q

What are the consequences of the Minimum Wage on the Market?

A
  • Labor surplus (unemployment)
  • Illegal workers below the minimum wage
  • Misallocation of resources
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16
Q

What are Fixed Prices?

A

When prices are fixed so that they cannot increase or decrease according to forces of supply and demand. An example is tickets for events.

17
Q

Define and state the Different types of Indirect Taxes

A

Taxes on spending to buy goods and services, paid indirectly to the government through the seller. They differ between excise (imposed on particular goods) and value added taxes (imposed on all goods).

18
Q

Why do Governments use Indirect Excise Taxes?

A
  • Source of government revenue
  • Discourage consumption of a good
  • Redistribute income (by taxing luxury goods)
  • Correct negative externalities
19
Q

What are the types of Indirect Excise Taxes?

A

1) Specific taxes (fixed amounts)

2) Ad valorem taxes (fixed percentage)

20
Q

What are the consequences of Indirect Excise Taxes on Stakeholders?

A 
Consumers: worse off
Producers: worse off
Workers: worse off
Government: better off
Society: worse off
21
Q

What happens to Producer, Consumer and Social Surplus after an Indirect Excise Tax?

A

Producer Surplus: decreases
Consumer Surplus: decreases
Social Surplus: decreases (gov. rev. and welfare loss)

22
Q

What is a Subsidy?

A

A payment by the government to firms in order to lower costs and price, and increase supply.

23
Q

Why do Governments use Subsidies?

A
  • Increase firm revenues
  • Make goods affordable to low income consumers
  • Encourage production of goods
  • Support growth of a particular industry
  • Encourage exports of a particular good
  • Correct positive externalities
24
Q

What are the consequences of Subsidies on Stakeholders?

A 
Consumers: better off
Producers: better off
Workers: better off
Government: worse off
Society: worse off
25
Q

What happens to Producer and Consumer Surplus after an Indirect Excise Tax?

A

Producer Surplus: increases
Consumer Surplus: increases
(+ welfare loss)

Economics (18 decks)

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