wk8/9 - Gov Intervention Flashcards
What is a Price Floor
A minimum legal price
There will be excess
(only impacts when above equilibrium P)
What is created when a price floor is implemented
A surplus
What happens to output when price floor on elastic demand
> proportional drop in equilibrium output.
(Higher effort cost)
What happens to output when price floor on inelastic demand
< proportional drop in output.
(Lower effort cost)
What is the consumer surplus
The area UNDER ordinary demand curve and Above market price
What is Producer surplus
The area above the market supply and below market price
What is a Price Ceiling
A maximum legal price
What happens if price ceiling is set below Free Market Price
There will be a shortage
e.g. Rent control
What is a direct tax
Imposed directly on income, profit, wealth etc
What is an indirect tax
VAT, tobacco, sugar etc
how many types of indirect tax
2
Specific Tax
Ad valorem tax
what is a specific tax
indirect tax on a good, levied at a certain amount per unit of the good, irrespective of price
What is Ad valorem taax
Indirect tax of a certain percentage of the price of the good
e.g. VAT
What is the Incidence of a tax
a measure of the effect of a tax on the prices consumers pay and sellers recieve
What happens to burden of tax with inelastic demand OR elastic supply
Burden is greater on consumer
What happens to burden of tax with elastic demand OR inelastic supply
Burden is greater producer
Who bears the burden of tax with perfectly elastic / inelastic supply
Perfectly elastic: Just Consumers
Perfectly Inelastic: Just Producers
Define Subsidies
Negative taxes
What happens when a subsidy is implemented
Market price will fall and QS ^
Define deadweight loss
The negative surplus that appears due to the subsidy
What impact does a subsidy have on CS and PS
CS & PS increase
however subsidy costs gov = deadweight loss
