Microeconomics Chapter 11: Government Intervention

Vocabulary flashcards covering government intervention in markets, including price floors, price ceilings, quotas, taxes, and subsidies.

Non-market conform intervention

Government interventions, specifically price and quantity regulations, that block free price formation and usually lead to market imbalances such as supply or demand surpluses.

Market conform intervention

Indirect government interventions, such as taxes and subsidies, where free price formation is maintained and the government shifts the market equilibrium in a desired direction.

Maximum price (price ceiling)

A government-determined price $p_{max}$ that the market price may not exceed, aimed at protecting consumer purchasing power.

Binding maximum price

A price ceiling that influences the market because it is set lower than the market equilibrium price ($p_{max} < p^*$).

Short side of the market rule

The principle that the smallest quantity of supply or demand at the intervention price determines the actual quantity traded in the market.

Excess demand

An unbalanced market situation where the quantity demanded ($q_D$) exceeds the quantity supplied ($q_S$) at a given price; also known as a shortage.

Minimum price (price floor)

A government-determined price that the market price must be greater than, aimed at protecting the producer's income.

Binding minimum price

A price floor that influences the market because it is set higher than the market equilibrium price ($w_{min} > w^*$).

Excess supply

An unbalanced market situation where the quantity supplied ($q_S$) exceeds the quantity demanded ($q_D$) at a given price; in the labor market, this appears as unemployment.

Support sales

A government action to eliminate excess demand where the government builds or provides goods themselves to offer at the maximum price $p_{max}$.

Quota

A direct quantity regulation that establishes a maximum quantity ($q_{max}$) or minimum quantity ($q_{min}$) that can be supplied or demanded in a market.

Direct tax

A tax levied directly on an entity's income or wealth, representing what they earn or possess.

Indirect tax

A consumption tax levied on the purchase of a good or service, which includes excise taxes and value taxes.

Excise tax

An indirect tax expressed as a fixed amount per physical unit of a product, such as a liter or kilogram.

Value tax (VAT)

An indirect tax expressed as a percentage of the price of a good, meaning the tax paid evolves along with the price of the good.

Tax incidence

The study of how the burden of a tax is shared among market participants, regardless of whom the tax is legally levied on.

Tax wedge

The difference between the consumer price ($p_D$) and the producer price ($p_S$) created by a tax, where $p_D - p_S = t$.

Consumer price ($p_D$)

The final price paid by the buyer in the market after taxes are applied.

Producer price ($p_S$)

The net price received by the seller after paying the required tax to the government.

Tax equivalence

The principle that in a competitive market, the final equilibrium outcomes (quantity, $p_D$, and $p_S$) are the same regardless of whether the tax is levied on the producer or the consumer.

Deadweight loss

A loss of total welfare or efficiency that occurs because a tax or regulation prevents some mutually beneficial trades from taking place.

Laffer curve

A curve illustrating the inverse U-shaped relationship between the tax rate ($t$) and total tax revenue ($t \times q$).

Consumer subsidy

A payment from the government to consumers where the demand function shifts upwards, resulting in a consumer price $p_D = p_S - s$.

Producer subsidy

A payment from the government to producers where the supply function shifts downwards, resulting in a producer price $p_S = p_D + s$.