Scribd Logo
Upload

Welcome to Scribd!

  • 4 views

    Government Intervention

    Uploaded by

    Lahiru Senadheera
    Government intervention in markets can be through subsidies, price ceilings, price floors, and taxes. The goals are typically to improve welfare, correct market failures, and redistribute income and wealth. Subsidies lower prices for consumers while price controls can result in surpluses or shortages depending on whether a price ceiling or floor is implemented. Taxes reduce both consumer and producer surplus, creating deadweight loss for society. The incidence of taxes depends on the price elasticity of demand - inelastic demand means consumers bear more of the tax burden, while more elastic demand allows producers to pass more of the tax on to consumers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content

    You might also like

    Government Intervention

    Uploaded by

    Lahiru Senadheera
    4 views4 pages
    Government intervention in markets can be through subsidies, price ceilings, price floors, and taxes. The goals are typically to improve welfare, correct market failures, and redistribute income and wealth. Subsidies lower prices for consumers while price controls can result in surpluses or shortages depending on whether a price ceiling or floor is implemented. Taxes reduce both consumer and producer surplus, creating deadweight loss for society. The incidence of taxes depends on the price elasticity of demand - inelastic demand means consumers bear more of the tax burden, while more elastic demand allows producers to pass more of the tax on to consumers.

    Original Description:

    Original Title

    Lec 5

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    Government intervention in markets can be through subsidies, price ceilings, price floors, and taxes. The goals are typically to improve welfare, correct market failures, and redistribute income and wealth. Subsidies lower prices for consumers while price controls can result in surpluses or shortages depending on whether a price ceiling or floor is implemented. Taxes reduce both consumer and producer surplus, creating deadweight loss for society. The incidence of taxes depends on the price elasticity of demand - inelastic demand means consumers bear more of the tax burden, while more elastic demand allows producers to pass more of the tax on to consumers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    4 views4 pages

    Government Intervention

    Uploaded by

    Lahiru Senadheera
    Government intervention in markets can be through subsidies, price ceilings, price floors, and taxes. The goals are typically to improve welfare, correct market failures, and redistribute income and wealth. Subsidies lower prices for consumers while price controls can result in surpluses or shortages depending on whether a price ceiling or floor is implemented. Taxes reduce both consumer and producer surplus, creating deadweight loss for society. The incidence of taxes depends on the price elasticity of demand - inelastic demand means consumers bear more of the tax burden, while more elastic demand allows producers to pass more of the tax on to consumers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    of 4

    3/23/2015

    Government Intervention
    Government intervene in price mechanism

    Government Reason
    ◦ Improve economic and social welfare
    ◦ To correct market failure

    Intervention
    ◦ To provide equal distribution of income and wealth

    Intervention methods
    ◦ Subsidies
    LECTURE 5
    ◦ Introducing Maximum price and minimum price
    ◦ Indirect Tax

    Effect of Subsidy Price Ceilings (Maximum Price)


    Payment given by the government for the production Government sets the price below to the market equilibrium
    When prices of gas are going high, Government set a Max price
    Government subsidy
    $ S0 It creates a shortage
    Seller’s share P =P Therefore;
    s 2
    of subsidy ◦ Draw lottery
    P0 S1 ◦ First come First serve
    Buyer’s ◦ Black market and Bribery
    share of Pb=P1
    subsidy
    D0

    Q0 Q1 Q

    Effect of Price Ceiling Price Floors


    Consumer Government set the price above than the market equilibrium
    Price
    surplus This causes a Surplus

    Deadweight Supply To protect the supplier this is done


    loss E.g. to encourage farmers to increase the production

    P0
    P1 Price ceiling

    Producer Demand
    surplus
    Q1 Q0 Quantity

    1
    3/23/2015

    Effect of Price Floor Dead Weight Loss (DWL)


    Consumer It is the welfare loss when a different price set other than the equilibrium
    Price
    surplus
    Supply It is a loss for both consumer and producer
    P2 Price Floor
    Deadweight
    P0 loss

    Producer Demand
    surplus
    Q1 Q0 Quantity

    Tax Effect of Tax


    Government raises money as tax
    ◦For national security $
    Gov revenue S1
    ◦National parks S0
    ConsumerPb=P1
    Types of taxes deadweight loss
    burden
    ◦Direct – tax on individual or company P0
    Producer
    ◦Indirect – tax on goods and services burden
    ◦Flat Rate Ps=P2
    ◦Ad-Valorun
    D0

    Q1 Q0 Q

    Price Consumer S1
    surplus
    S0 Dead Weight Loss
    A
    When government imposes taxes the loss of consumer and buyer which cannot be gained by the
    P1 government
    tax
    B C
    Deadweight
    P0 loss Known as welfare loss
    D E
    P1–t
    F

    Producer Demand
    surplus
    Q1 Q0 Quantity

    2
    3/23/2015

    Tax and PED (Incidence of Tax) PED and Tax


    Who pays more tax revenue depend on the relative of elasticity of demand
    If demand curve is relatively inelastic then more tax burden on consumer Good A Good B
    P S+tax S P S+tax S
    If demand curve is relatively elastic then more tax burden on Producer
    Perfect Inelastic on Demand Curve – all the tax on consumer 2.90
    $1 $1
    2.20
    2.00 2.00
    1.90

    1.20
    D
    D
    Qtax Qe Q Qtax Qe Q

    Perfect Elastic Demand and Tax


    Perfect Inelastic Demand and Tax

    PES and Tax Perfect Elastic Supply and Tax


    Consumer bears all the tax

    Source: http://thismatter.com/economics/tax-incidence.htm

    3
    3/23/2015

    Perfect Inelastic Supply and Tax


    Seller bears all the tax

    Q1 Q0

    You might also like