Role of Government in markets / Microeconomics + Price Controls

Unit 2, Microeconomics

Direct taxes

T axes on income, profits or wealth paid directly to the government. These amounts are

paid to the government by the person who earns the income /profits or owns the wealth.

Indirect taxes

T axes on expenditure to buy goods and services. These tax amounts are included in or

added to the selling price and so over paid to the producer who is responsible for

passing the tax payments onto the government.

Industrial policies

A type of interventionist supply-side policies (macroeconomics) whereby the government

chooses to support specific industries through preferential tax cuts, subsidies, subsidised

loans and other means as they are considered pivotal in the growth prospects of the

economy.

(domestic) Subsidies

A grant / amount of money paid by the government to a firm, per unit of output, to

encourage production and lower the price to consumers.

Market failure

The failure of markets to achieve allocative efficiency. Markets fail to produce the output

at which marginal social benefits are equal to marginal social costs; social or community

surplus (consumer surplus + producer surplus) is not maximised.

Sustainability

Refers to the preserving the environment so that it can continue to satisfy needs

and wants into the future. This is one of the key concepts of IBDP economics.

Equity

The concept or idea of fairness.

Price controls

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

Price controls

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

influence market outcomes.

Stakeholder

An individual or group of individuals who have an interest, or stake, in an economic

activity or outcome.

Allocative efficiency

Achieved when just the right amount of a good or service is produced from society’s

point of view so that scarce resources are allocated in the best possible way in this

market.

Efficiency

In general, it involves making the best use of scarce resources. May refer to producing at

the lowest possible cost or to allocative efficiency where marginal social costs are equal

to marginal social benefits or where social surplus is maximum.

Minimum price or price floor

An example of a price control in which the government or other authority sets the price of

a good, service or resource above the market equilibrium price of that good or service.

The price of this good can not fall below this price. A minimum price is often

accompanied by a government buying the surplus.

Minimum wage

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

equilibrium wage rate. This is done to protect low wage earners and to improve their

standard of living / economic well-being.

Unemployment

When a person (who is above a specified age and is available to work) is actively looking

for work, but is without a job. This could be the result of a minimum wage or other causes

(cyclical, structural, seasonal, frictional are other causes to be studied).

Surplus

Situation in the market when quantity supplied is greater than quantity demanded at a

particular price (could be the result of a minimum price or slow adjustment to a new

market equilibrium)

Indirect taxes

A form of government intervention in the market for a particular good or service

(microeconomics). A payment to the government based on the expenditure / spending on

a particular good or service which is included in the selling price or added to the

expenditure on the good or service. This measure will lower the willingness to supply and

increase the price of the good or service to the buyer. This tax will lead to government

revenues.

Regressive taxation

Payment to the government where the fraction of tax paid decreases as income

increases. The average tax rate decreases. All indirect taxes are regressive.

Producer subsidy

A form of government intervention in a particular market (microeconomics). The

government pays a grant per unit produced to a firm. This is done to increase the supply

of the good or service and so lower the price to consumers.

Government provision / direct provision

The government is responsible for the production of a particular good or service.

Government revenues are needed to finance the production of the good. Publicly

provided services like education and health care or facilities like parks, motorways,

sewage systems to reduce market failure.

Command and control regulation and legislation

Direct rules and laws set by a government or authority to limit / govern / ban an activity

by a firm often according to environmental or social reasons.

Consumer nudges

Small design changes that include positive reinforcement and indirect suggestions that

can influence the behaviour of consumers in order to improve the well-being of

individuals and society.