2.7 Role of government in microeconomics

    Cards (13)

    • Reasons for government intervention in markets:
      • earn government revenue
      • support firms
      • support households on low incomes
      • influence level of production
      • influence the level of consumption
      • correct market failure
      • promote equity
    • Main forms of government intervention in markets:
      • price ceilings
      • price floors
      • indirect taxes and subsidies
      • direct provision of services
      • command and control regulation and legislation
    • Price ceilings (maximum price) are used to:
      • increase consumption of the good or service
      • reduce the price of certain goods or services for low-income consumers
      • prevent exploitation by monopolies
    • Possible consequences of imposing a price ceiling:
      • shortages
      • generates a rationing problem
      • promotes the creation of black markets
      • eliminates allocative efficiency and generates welfare loss
      • consequences for market stakeholders
    • Price floors (minimum price) are used to:
      • increase the income of producers of goods and services that are subject to large price fluctuations or great foreign competition
      • to protect workers
    • Possible consequences of imposing a price floor:
      • surplus
      • promotes the creation of black markets
      • government needs to dispose of surplus
      • might create firm inefficiency
      • eliminates allocative efficiency and generates welfare loss
      • consequences for market stakeholders
    • Indirect taxes are taxes that are not imposed directly on people's income or wealth. They are paid indirectly by consumers when they purchase a good, as indirect taxes are included in the price of the good.
    • Aims of indirect taxes are to:
      • collect government revenue
      • discourage consumption of undesirable and/or dangerous goods
      • redistribute income within the population
      • correct negative externalities
    • There are two types of income taxes:
      • Specific tax - a fixed amount of tax imposed on a good or service per unit sold
      • Percentage tax / ad valorem tax - a fixed percentage charged on the selling price of the good
    • Subsidies are per-unit payments that are used to lower production costs and increase the output of the market.
    • Subsidies are used to:
      • increase revenue of producers
      • to make basic necessities and merit goods more affordable to low-income earners
      • to encourage consumption of goods with positive externalities
      • to support growth of a particular firm
      • to encourage exports and protect national firms from foreign competition
      • to correct positive externalities
    • Direct provision of services is when the government provides services directly to the public.
      Eg. public transport, education, healthcare
    • Regulation and legislation involve the government intervening in the markets through the legal system.