Chapter 4 - Government Intervention

What is a price floor?

A minimum price set by the government for a particular good or service, above the equilibrium price.

Example of a price floor

Agricultural products in the U.S. have price floors, such as those for milk, to support farmers' income.

What is a price ceiling?

A maximum price set by the government for a good or service, below the equilibrium price.

Example of a price ceiling

Rent control in major cities like New York limits how much landlords can charge for rent.

What is government intervention in the market?

Actions taken by the government to influence economic activity, often to correct market failures.

Why do governments impose price floors?

To ensure sellers receive a minimum income and to stabilize the market.

Why do governments impose price ceilings?

To protect consumers from excessively high prices and ensure affordability.

Consequences of price floors

Surplus of goods as supply exceeds demand at the higher price.

Consequences of price ceilings

Shortages of goods as demand exceeds supply at the lower price.

Indirect taxes

Taxes imposed on goods and services, increasing their price and affecting demand.

Example of indirect tax

Value-added tax (VAT) applied to most goods, increasing their price to consumers.

Aim of indirect taxes

To reduce consumption of harmful goods and generate government revenue.

Subsidies

Financial support given by the government to encourage production or consumption of certain goods.

Example of a government subsidy

Biofuel subsidies in many countries to promote renewable energy.

Effects of subsidies

Lower prices for consumers and increased supply from producers.

Market equilibrium

The point where the supply of a good matches demand.

Effect of a price floor on market equilibrium

Creates a surplus as the price is kept above equilibrium.

Effect of a price ceiling on market equilibrium

Creates a shortage as the price is kept below equilibrium.

Government buying up surplus

When the government purchases excess supply to prevent prices from falling.

Example of government buying up surplus

The U.S. government buying excess dairy products to maintain farmers' incomes.

Advantages of price floors

Help agricultural producers maintain stable incomes.

Disadvantages of price floors

Can lead to wasted resources and high storage costs for surplus.

Advantages of price ceilings

Protect low-income consumers from high prices.

Disadvantages of price ceilings

Can lead to black markets and poor quality goods.

Market efficiency

Occurrence when resources are allocated in the most efficient way.

Market failure

When the allocation of goods and services is not efficient, often due to government policies.