2.7 The Effects of Government Intervention in Markets

• Government intervention in markets refers to actions taken by the government to influence or control market outcomes
• What is an example of a price control used by the government?

  Rent control
• Government intervention is often justified by the need to correct market failures.
• An example of a price control used by the government is rent control
• What is one rationale behind government intervention in markets?

  Correcting market failures
• A price ceiling is a maximum price set by the government below the market equilibrium
• What is one effect of a price ceiling on the market?

  Shortage
• Match the type of government intervention with its description:

  Price Controls ↔️ Setting maximum or minimum prices

  Taxes ↔️ Imposing charges on goods or services

  Subsidies ↔️ Providing financial assistance

  Regulations ↔️ Implementing rules or standards
• A price ceiling is a maximum price set by the government below the market equilibrium
• What is one effect of a price ceiling on the market?

  Shortage
• A price floor is set above the market equilibrium price.
• One effect of a price floor is a market surplus
• What is an example of a price floor in practice?

  Minimum wage laws
• When a tax is levied on a good, it increases the cost of production, shifting the supply curve to the left
• What happens to the equilibrium price and quantity when a tax is imposed on a good?

  Price increases, quantity decreases
• The tax incidence depends on the elasticity of supply and demand.
• Match the party affected by a tax with its effect:

  Consumers ↔️ Pay higher prices

  Producers ↔️ Receive lower prices after tax
• The tax incidence refers to how the tax burden is distributed between consumers and producers
• What happens to the tax burden if demand is inelastic?

  Consumers bear more
• Producers receive lower prices after tax when a tax is imposed.
• Government intervention is often justified to correct market failures
• Price controls involve setting maximum or minimum prices
• Financial assistance to producers or consumers is called a subsidy
• What is an example of a trade barrier used in government intervention?

  Tariffs
• The rationale for government intervention includes correcting market failures and protecting consumers.
• Match the intervention type with its description:

  Price Controls ↔️ Setting maximum or minimum prices

  Taxes ↔️ Charges on goods or services

  Subsidies ↔️ Financial assistance to producers

  Regulations ↔️ Rules and standards
• What is a price ceiling set below in the market?

  Equilibrium price
• A shortage occurs when quantity demanded exceeds quantity supplied
• What is a price floor set above in the market?

  Equilibrium price
• A surplus occurs when quantity supplied exceeds quantity demanded.
• Taxes on goods increase the cost of production
• What does tax incidence depend on?

  Elasticity of supply and demand
• Subsidies shift the supply curve to the right, leading to lower prices and higher quantity.
• What happens to consumer surplus, producer surplus, and total welfare under a price ceiling?

  All decrease
• A subsidy can increase total welfare if it corrects a market failure
• Public goods are often provided by the government to address market failures.
• What is an example of government intervention to address externalities?

  Carbon taxes