Ib economics SL government intervention 2.7

Indirect taxes

Taxes on expenditure to buy goods and services.

Specific tax

A tax of a fixed amount imposed on a product, regardless of its price.

Ad valorem tax

A tax calculated as a fixed percentage of the price of the good or service; the amount of tax increases as the price increases.

Subsidies

An amount of money paid by the government to a firm, per unit of output, to encourage production and lower the price to consumers.

Price controls

Prices imposed by an authority, set above or below the equilibrium market price.

Price ceiling (maximum price)

A price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.

Price floor (minimum price)

A price imposed by an authority and set above the market price. Prices cannot fall below this price.

Maximum price

A price set by a government or other authority that is below the market equilibrium price of a good or service, also known as a price ceiling.

Minimum price

A price set by a government or other authority above the market equilibrium price of a good or service, also known as a price floor.

Minimum wage

A type of price floor where the wage rate, or the price of labour, is set above the market equilibrium wage rate.

Subsidy (international)

An amount of money paid by the government to a firm, per unit of output, to encourage production and provide the firm an advantage over foreign competition.

Indirect taxes and subsidies impact diagrammatically

Taxes shift the supply curve upwards (or to the left), subsidies shift it downwards (or to the right).

Welfare loss

A loss of a part of social surplus (consumer plus producer surplus) that occurs when there is market failure so that marginal social benefits are not equal to marginal social costs.

Government intervention

The practice of a government influencing the allocation of resources in an economy, through taxes, subsidies, and price controls, to correct market failure or promote equity.