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Government Intervention

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ayesha
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6 views

Government Intervention

Uploaded by

ayesha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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indirect Éitiosedby the government on the productionofgoods

services the burden of which is partially shared by both consumers toproducers

why
1
government's imposes excise taxes
as
serves a significant income source for governments to fund publicservices
infastructure
2 Used to discourage theconsumption of harmfulgoods byincreasing their
price aiming to reduce consumption and related negativeimpacts
3 Helps tocorrect market failure where the true costsof certain goods services
tenantes internalizing
skates ehfamdkmoajstysea f9 it ty
Easter p I ir m sig g iEtes niitItsus
Specific tan per unit tax flat rate tan
amount of tan imposed per unit of a good
fined or service

P
s s tax
s me
92 1
welfare loss atb
Évinue
SELF
MB
Q
at Qe

red

A tan imposed on a marketresults in a change in the equilibriumprice and quantity


Quantity produced and consumeddecreasesfrom Q Qt

Equilibriumpriceincreasesfrom ptoPc whichis paid consumers


by
Governmentgrantssubsidy resulting in a parallel downwardshift of the
supply curve from S1 to S2 as subsidy lowers the effectivecost of
productionfor firms increasingtheir willingness to supply more output at every
price level
sasb
EF.li Ep EehtfaR Edpaek ftp.iit.gsoustiizs

i
Government incurs the subsidy cost which burdens its budget potentially leading
to reduced spending elsewhere increased taxes or a budgetdeficit
Expansion in output from Q Qsb might result in increased employment
opportunity beneffitting workers who find new jobs
When subsidies are applied there is a welfare lossbecause resources are
over allocated to the productionof subsidized goods

If the subsidy applies to exports it can decreaseprices and increase exported

TESTEEEffete kz inE tgosasbntthffcestgiesn


producers who was
Pricefloor is defined as the minimum price that is set above the equilibrium
priceby government in a market for a particular good service to provide
income support for farmers or protect low skilledworkers

Whygovernments imposes pricefloors

I itat.EEie i eiisEEi p.in naeiEsnEiise

t.EE EEs iei i aiii.ie


Minimum wage resource market labour protecting low skilled workers
by establishing a wage floor minimum wage above the market determined
wage rate
To ensure workers receive a decent standard of living Bysetting a
minimum wage it can enhancethe income of low wage workers and reduce
income inequality However it might also result in decreasedunemployment
opportunities as some employers might not be able to afford to hire as
manyworkers at higherwage potentiallyleading to unemployment or a
reduction in work hours for some individuals
Price ceiling

Income Redistribution as it assist low income earners priceof


by keeping
necessities with in their budget thereby reducing income inequality
Maintaining market stabilityduring times of natural disasters emergencies
by preventing panic buyingand hoarding
Government mightuse priceceiling to ensure access to crucial items like
goods housinghealthcare etc to promote social welfare

s Mc

btd deadweightloss
a b
pe
c d
Pce
MB
as Qe Qd

When theprice ceiling Pc is imposed below the equilibrium price Pe It limits


the price that sellers can charge for the product service As a consequence
Producers
may find it less profitable to supplytheproducts at the price set by
the government because it is below whatthey could recieve at the equilibrium
This situation leads to a decrease in Qs becomes
BEHE'pticating'shu aneIIyP'IeeoTEhpr etnay EastEcguant
demanded Qd as consumers find the product more affordable

Eitan c is it atisankaste Buyer's seize


so because there is not
enough of the In this
goodbeingsupplied situation
where a price ceiling causes a shortage non price rationingmethods come into
play to allocate the limited Quantity of the good among potential buyers

Iff the s teeth distribution ofcoupons allowing set purchases of


a
the scarce good within specific time frame ensuring equal opportunities
favouritism
The price ceiling leads to an inefficient allocation of resources some consumers
who are willing to pay more at the equilibrium price cannot obtain the
product due to the shortage In responseto the shortage a black market
might emerge where the good is sold at a price higher than the price
cieling some producers might stillbenefitfrom increased demand resultingfrom
lower prices due to the priceceiling However for many producers due to priceceiling
sellsgoodbelowthe equilibrium price reducingtheir incentive to produce as their

i
essential goods to ensure social welfare and addressing
or for income
inequality
Enforcing price ceiling requires monitoring and regulations which can be
administrativelychallenging and costly for thegovernment workers are also
worse off as reducing outputfrom Qe to Qs lead to unemployment as producers
would layoff workers

examples for

fruition
e
my is

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