Role of Government in Microeconomics Flashcards
Why does the government intervene in markets?
Earn revenue
Support firms and households
Influence production and consumption
Correct market failures
Promote equity
What are price floors?
Minimum prices set by the government. If the equilibrium price is lower, a surplus occurs.
What are price ceilings?
Maximum prices set by the government. If the equilibrium price is higher, a shortage occurs.
What are indirect taxes?
Taxes on consumption (e.g., VAT) that increase production costs and shift supply leftward.
What are subsidies?
Government payments to firms to reduce costs, encouraging production and shifting supply rightward.
What is direct provision of services?
When the government provides services itself (e.g., libraries), rather than relying on private firms.
What is command and control regulation?
Laws that directly restrict or ban certain products to regulate the market (e.g., banning tobacco ads).
What is government failure?
When government intervention causes inefficiencies or worsens outcomes instead of improving them.
What are the consequences of price ceilings?
Intended: Lower price than in a free market Shortage arises (Qs < Qd)
Consumer surplus increases
Producer surplus decreases
Government may need to supply the good
What are disadvantages of price ceilings?
Some consumers are unable to purchase due to the shortage.
The unmet demand usually encourages the creation of illegal markets.
Quality of goods and services go down.
What are the consequences of price floors?
Intended: Higher price than in a free market
Surplus arises (Qs > Qd)
Consumer surplus decreases
Producer surplus increases
Government may need to buy excess supply
What are disadvantages of price floors?
What to do with the bought excess supply? Burn, sell or store it?
Inefficiency and waste
Creation of black markets
What are the consequences of indirect taxes?
Intended: Higher price, less quantity demanded
Consumer surplus decreases
Producer surplus decreases
Government tax revenue increases
What are disadvantages of subsidies?
Opportunity cost
Prone to polictical pressure and lobbying
Decreased efficiency
What are the consequences of subsidies?
Intended: Lower price, increased quantity demanded
Consumer surplus increases
Producer surplus increases
Government must spend more (opportunity cost)
What are disadvantages of indirect taxes?
Effectiveness depends on price elasticity of demand.
Regressive impact.
Unemployment.
What are the disadvantages of direct provision of services?
Greater tax burden.
Excess demand + not as efficient as private firms.
What are the disadvantages of regulation and legislation?
Hard to monitor and costly.
