Government intervention Flashcards
(23 cards)
4 ways that the government can intervene
Price ceilings, price floors, taxes, subsidies
Price controls
The setting of minimum or maximum prices by the government, can result in market disequilibrium
Price ceilings
Legal maximum price set below the equilibrium price (Eg: housing prices)
price ceilings: consequences on the market
Allocatively inefficient, creates welfare loss as MB>MC.
- Shortages
- Non-price rationing
- Underground markets
- Negative welfare impacts
- Underallocation of resources (workers) to the good and allocative inefficiency
Why the government intervenes in markets
levels of production, equity, support for particular groups, revenue for the government, correct market failure, levels of consumption, support to firms
Price floors
legal minimum price set above the equilibrium price (Eg: minimum wage)
Subsidies
An amount of money paid by government to firms
Why do governments pay subsidies?
To increase producer revenue, to make necessities affordable, encourage production of a certain good, support the growth of certain industries, encourage exports of a good, correcting market failures
Excise
A tax levied on certain goods and commodities produced or sold within a country and on licences granted for certain activities.
Indirect tax
Tax levied on goods and services
Direct tax
Taxes paid directly to the government by taxpayers
Ad valorem tax
Tax that is a percentage
Specific tax
Tax that is a certain price
Common pool resrouces
Goods that are rivalrous and non-excludable (eg: fish in the ocean)
Market failure
When the market fails to allocate good efficiently or to provide the quantity and combination of goods desired by society.
Allocative inefficiency
When MSB≠MSC
Externalities
Positive or negative side effects of consumer or producer behaviour
Why should the equilibrium be at (Qopt, Popt)? (socially minimum output and demand)
Because the good should be produced at an optimum price because the marginal social costs and benefits is different from the marginal private cost and benefits.
Marginal private costs (MPC)
Costs of producer producing one more good
Marginally social costs (MSC)
Costs of society producing one more good
Marginal private benefits (MPB)
Benefits to consumers consuming one more unit of the good
Marginal social benefits (MSB)
Benefits to society consuming one more unit of the good
When does the competitive free market result in MPC=MSC=MPB=MSB?
When there are no externalities
