Chapter 6: Government Intervention

Why does the government get involved?

change distribution of CS/PS via price control, to change Q* (encouraging/discouraging consumption/production via taxes and subsidies), correcting market failure, money/reelection/appeasing lobbyists, prop up macroeconomy

Price ceiling

A policy that sets a maximum price on a good (rent control, gas in the 70s, insurance out of pocket maximum)

Price floor

a policy that sets a minimum price (minimum wage, agricultural products)

Nominal vs. adjusted minimum wage

What the number actually is vs. what it is after being adjusted for inflation

Price ceilings and price floors are for the purpose of ________, and can only _______ Q*

redistributing the surplus, decrease

tax

when government collects per unit of charge from buyers or sellers in the market

subsidy

government offers per unit payment to buyers or sellers

Why tax/subsidy?

To change Q* - correct market failure, fund government, shift macroeconomy

Golden rules of tax and subsidy

doesn’t matter WHO you tax/subsidize - the outcome is the same, only relative elasticity of S & D matter (inelastic demand, for instance, will pay more of a tax or receive more of a subsidy)

Which group does the government tax more? Why? 

producers - logistics (fewer of them), politics (easier to make voters think they won’t be impacted by taxes)

what are the 4 possible tax/subsidy graphs?

tax/sub on consumer and D is relatively elastic, tax/sub on consumer and S is relatively elastic, tax/sub on producer and D is relatively elastic, tax/sub on producer and S is relatively elastic

Tax wedge

the wedge between what buyers pay and what sellers take home