2.7 Role of Governments in Microeconomics

• Indirect taxes


  Taxes on the spending on goods and services by consumers, collected by the supplier on behalf of the government
• Subsidies


  Grants provided by the government to firms aimed at lowering production costs and increasing output
• Producers


  • Benefit from cheaper production costs
• Consumers


  • Price doesn’t change at first
  • Price goes down after
  • Benefit as consumer surplus increases
• Government receives NOTHING from subsidies
• Deadweight Loss (DWL)


  Where society gets nothing; occurs when the government intervenes
• Price Floor


  A government-imposed minimum price for which a good or service can be sold
• Price floors


  • Low-skill labour (minimum wage)
• Decrease in supply (shift left)

  Higher price for consumers
• Price Floors


  • Used to ensure ethics in the free market
  • Ensure people have enough money to survive
  • Prevent overworking or underpaying
• Price floors are always above the equilibrium (EQ)
• As price increases due to price floors

  Demand decreases and there is a surplus of goods
• Governments will often buy surplus goods or services to be sold for a low price to another country or to be used by the government itself
• Price Floors


  • Benefit the producers
• Price Ceiling


  A government-imposed maximum price in which a price or service can be sold
• Price Ceilings


  • Water
  • Electricity
• Price Ceilings


  • Benefit consumers (increase Consumer Surplus)
• Price Ceilings cause inefficiency as it’s not at equilibrium (EQ)