AP Mirco Government Intervention

What are the fours ways in which a government can intervene in a market?

They can impose a price ceiling, a price floor, a tax, and a subsidy

price controls

legal restrictions on how high or low a market price may go

price ceiling

A legal maximum on the price at which a good can be sold

What do price ceilings do?

They essential cause a shortage, which will decrease the producer surplus and cause deadweight loss

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

price floor

A legal minimum on the price at which a good can be sold

What do price floors do?

They create surpluses, and these surpluses will change the values of the consumer and producer surpluses and cause deadweight loss, which will decrease the total surplus

What does the presence of Deadweight loss mean?

the economy is not operating at an efficient level

Excise taxes

a tax placed on the production of a good, essentially causes the supply curve to shift to the left because the cost to produce is so high

When an excise tax is placed on a good, how does it affect the price?

It raises price by shifting the supply of a good to the left.

To calculate shift, you move each point up by how much the tax is. The new intersection with the demand curve is the equilibrium price with the tax

What is the price for the good that consumers pay?

it is the new equilibrium price

What is the price that producers pay?

it is the price point that intersects the old supply curve directly below the new equilibrium point

How does one calculate the total revenue of a tax?

by calculating the area between the old prices and the new price and the new quantity produced

How does one calculate the amount of the tax that consume pay?

By calculating the area of the tax revenue above the old equilibrium Line

How does one calculate the amount of tax the producers pay?

It is the area of the the tax revenue below the old equilibrium point

Subsidies

a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.

shifts the supply curve right because it is now cheap to produce a good.

total expenditures

the total amount spent by consumers on a good or service; calculated as equilibrium price times equilibrium quantity

total revenue

the amount that the seller pays to produce a good multiplied by the quantity.

Total expenditures formula

Consumer price x quantity

Total revenue formula

producer price x quantity

How does one tell if the tax has a good impact?

You see if it produces deadweight loss. Recall, any deadweight loss represents a loss of efficiency and has a negative impact on an economy. Normally, all taxes create deadweight loss and are harmful to efficiency

For a perfectly inelastic good, who pays the tax burden?

The consumer pays the tax entirely

For a relatively inelastic good, who pays the tax burden

The consumer pays most of the tax

For a unit elastic good, who pays the tax burden?

The burden is equally shared between the producers and the consumers

For a relatively elastic good, who pays the tax burden?

The producer pays most of the tax

For a perfectly elastic good, who pays the tax burden?

The consumer pays the tax entirely

total revenue test

A test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it does not change when price changes.