Microeconomics: Government Intervention

Tax imposed on people's expenditures on products

Taxes on people and service

The supply curve shifts inwards
Quantity decrease, Price increase

The amount of the tax is fixed

An indirect tax expressed as a percentage of the good's price

There is a parallel shift of the supply curve (the distance between the curves is the tax)

There is NOT a parallel shift of the supply curve.
The shift is bigger as the price increases because because the % tax applied to a higher price results in a higher absolute tax.

- Decrease in supply
- Price equilibrium increases, Quantity equilibrium decreases

Refers to who pays for the tax

Both the producers and consumers

The producer realizes that too much of an increase in price will result in a drastically reduced quantity demanded (the law of demand)

The producers, because they know if the prices increase too much, the consumers would not buy the product

The consumers, because if the price is increased the consumer demand will not change as much as the % change in price

Consumers are trapped by addiction -> demand for those products is inelastic -> they will pay the higher price without reducing demand too much -> the government receives large tax revenues

The incidence of the tax is always higher on the side that has the lower elasticity

The amount of money paid by the government to the producers to help them cover part of their (high) costs on production

- To keep prices low for certain goods
- To guarantee the supply of products that the government thinks are necessary for the economy
- To protect industries supplying a lot of employment that would otherwise shut down causing social problems
- To enable domestic producers to compete with foreign companies

- Supply curve shift outwards (increase in supply)
- Price decrease, Quantity increase
- Creates DWL because the government spends on the subsides more than the subsides benefit the consumer/producer.

The surplus that previously belonged to the consumers or producers, but following government intervention, it no longer belongs to anyone.

- Opportunity cost (less money spent on other governmental projects)
- Unfair (only supports producers in certain industries)
- Taxpayers would have to pay the tax (as consumers can buy the products at a low price)

- The subsidy might allow firms to be inefficient. In a free market they would have to be more efficient to compete (on price)
- The subsidy allows consumers to pay a lower price but taxpayers are paying for the price difference, the subsidy.
- Subsidies can lead to overproduction
- There is a great deal of international debate about subsidies given to farmers in high income countries. This leads to overproduction and is damaging to farmers in developing countries that cannot compete (because their government cannot give them any subsidies)
- Government can spend subsidy money for other purposes (Opportunity cost)

The minimum limit imposed on the price of a good to help suppliers of certain goods who would have difficulties surviving if the market price goes below a certain level. It must be set ABOVE the equilibrium price.

The maximum limit imposed on the price of a good in order to make it accessible to as many consumers as possible. It must be set BELOW the equilibrium price

Shortage (excess demand)

Surplus (excess supply)

- Inefficiently low quantity produced (Shortage)
- Inefficiently low quantity of goods
- Inefficiently allocation of goods to customers
- Creation of Black markets

Government can:
- Give subsidy
- Direct provision (producing the good themselves)
- Release previously stored stocks

- Inefficiently low quantity sold (Surplus)
- Inefficiently high quantity of goods
- Wasted resources
- Creation of Black markets

Government can:
- Buy the surplus and destroy it
- Buy the surplus and store it
- Buy the surplus and sell it to other countries (this creates dumping)
- Buy the surplus and give to other countries and overseas assistance
- Use quotas