Objectives
- Earn revenue for government
- Influence consumption
- Provide support
- Firms
- Low income
- Promote equity
- Correct market failure
Government Intervention
Taxes
Indirect, excise taxes: Taxes imposed on producers upon production.
- Source of government revenue
- Discourage consumption of harmful goods
- Redistrubute income (Luxury Taxes)
This chapter outlines how these taxes can distrupt an efficient allocative economy.
Types of taxes:
- Fixed: Fixed amount per product bought/sold.
- Leftward shift in supply curve
- Ad valorem: Percentage, increases and price increases.
- Slope increase of supply curve. Overall, less allocation of resources to producing the good.
Stakeholders: Have interest in and are affected by. Consumers: Both less of it, and more expensive, lose lose situation. Producers: Fall in revenue. Government: Only stakeholder that gains Workers: Less resources needed to produce = less workers required = less employment. Society: Under-allocation, which is worse. Foreign producers:
HL material: Calculation of different equations, and how they are affected from government imposed taxes.
Subsidies
Subsidies: Like reverse taxes, which are usually specific amounts, fixed, that are granted per unit of production. This is to:
- Increase incomes of producers, that governments support, typically agriculture.
- Allows certain goods to be more affordable to the poor, since it lowers prices.
- Overall, encourages growth in the certain market. A rightword shift in supply line.
Stakeholders: Consumers: Fall in price of goods, increase in quantity purchased. Producers: Receives higher price to produce larger quanitity. This translates to increase in revenues. Government: Paying subsidy is burden to budget. Thus, impact on government budget is negative. Workers: More likely to hire, positive. Society: Better, overallocation of resources to the production of good. Foreign producers: Since it provides better exports, it may interfere with competing international domestic producers.
HL Content: Calculations again.
Price controls
Setting min (ceiling) and max prices, so prices cannot adjust to equilibrium level. Persisting market disequililbrium.
Ceilings:
Consequences:
- Shortages in demand and supply
- Non-price rationing: Waiting in line, favouritism, coupons. (Unsatisfied means good not delivered or not bought)
- Underground markets (Illegal): Buying good at max legal price, selling it for even more.
- Under-allocation of resources: Society worse off.
- Negative welfare impacts: Stakeholders: Consumers: Win and lose. Those who can buy it for the cheap price win, those who are unsatisfied lose. Producers: Lose,
Floors:
Purpose: In agriculture, these price floors are called “price supports”, ensuring that agricultural economies are still successful. Consequences: Welfare loss, inefficient farming Stakeholders: Consumers: Lose, paying higher price Producers: Win, protected against low cost farming, as well as receiving higher prices Workers: Employment boost Government: Buying the excess supply is burden on budget