GOVERNMENT INTERVENTION

If we let businesses do what they want (produce what they want,

charge how much), it would lead to MARKET FALIURE.
Government Intervention: In a mixed economy, when resources fail to
allocate in the most efficient way it leads to a misallocation of resources,
there arises a need for the government to intervene in order to solve this
problem.
Methods of Government Intervention:
1. Taxes
2. Subsidies
3. Price Controls
4. Laws and Regulations

TAXES
Tax: an amount paid to the government by consumers and producers (;
source of governments income. Tax is a cost of production.
Indirect Taxes: a small percentage of money imposed on goods and
services, paid to the producers, then passed onto the government. E.g
GST, VAT
Excise Duties: taxes imposed on certain (harmful) goods and services
such as alcohol and cigarettes.
Excise duties discourage the consumption of demerit goods.
Excised taxes can also be used to re distribute income.
Direct Taxes: an amount of money paid directly to the government;
e.g income tax, corporate tax, wealth tax, inheritance tax
Government needs taxes to provide public services such as roads,
housing, healthcare etc.
Indirect Taxes and allocation of resources
Indirect taxes cause allocative inefficiency and a welfare loss to society, as
the marginal benefit will not be equal to the marginal cost and hence,
there is no allocative efficiency.
Why governments impose indirect taxes

They are a source of revenue for the government, (especially

inelastic goods such as cigarettes and alcohol)
They are a method to discourage the consumption of harmful goods
Excise taxes can be used to re-distribute income
Excise taxes help to improve the allocation of resources, especially
with negative externalities

SUBSIDIES
PRICE CONTROLS
Minimum Price and Maximum Price
Consequences
When Qd is not equal to Qs, we follow Qs.