Government Intervention in the market Flashcards
(22 cards)
What is consumer surplus?
The difference between the highest price a consumer is willing to pay and the price they actually pay.
What is producer surplus?
The difference between the lowest price a firm is willing to accept and the price it actually receives.
Define marginal benefit.
The additional benefit to a consumer from consuming one more unit of a good or service.
Define marginal cost.
The additional cost to a firm from producing one more unit of a good or service.
What does economic surplus mean?
The total of consumer surplus and producer surplus in a market.
What is deadweight loss (DWL)?
The reduction in economic surplus due to a market not operating at competitive equilibrium.
When is a market economically efficient?
When the marginal benefit equals marginal cost and total surplus is maximized.
What happens at the competitive market equilibrium?
Marginal benefit equals marginal cost; consumer and producer surplus are maximized.
What is a price ceiling?
A government-imposed maximum price for a good or service (e.g. rent control).
What happens if a price ceiling is set below equilibrium?
It causes a shortage and leads to deadweight loss.
What is a price floor?
A government-imposed minimum price for a good or service (e.g. minimum wage).
What happens if a price floor is above equilibrium?
It causes a surplus and leads to deadweight loss.
What is the effect of a per-unit tax on a market?
: It raises the price for consumers, lowers the price received by producers, reduces quantity, and creates a DWL.
What is tax incidence?
The division of the burden of a tax between buyers and sellers, determined by elasticity.
How does elasticity affect tax incidence?
The side of the market (buyer or seller) that is more inelastic bears more of the tax burden.
What is a subsidy?
A payment from the government to producers or consumers that reduces the cost of a good and increases quantity traded.
What is an externality?
A side effect of production or consumption that affects third parties not directly involved in the transaction.
What are the four types of externalities?
Negative production (e.g. pollution)
Positive production (e.g. R&D)
Negative consumption (e.g. smoking)
Positive consumption (e.g. education)
How does a negative production externality affect the market?
It causes overproduction and a DWL because marginal social cost (MSC) exceeds marginal cost (MC).
What is a Pigovian tax?
A tax equal to the marginal external cost, designed to reduce output to the socially efficient level.
How do taxes help with negative externalities?
They internalise the externality by making producers bear the external cost, aligning private and social costs.
List key reasons governments intervene in markets.
To maintain competition
To address externalities
To support merit goods and public goods
To correct for asymmetric information
For equity and income distribution
For macroeconomic stabilisation
