THEME 1 - MICRO

Go-to points and evaluations for subsidies

Point	Evaluation
Lower prices for consumers	Opportunity cost to government
Higher profits for firms → more jobs	Firms become dependent on subsidy and become lazy/inefficient
Higher profits for firms → more investment

Go-to points and evaluations for minimum price

Point	Evaluation
Higher minimum price → reduces consumers’ overconsumption caused by incomplete information	Inelastic demand → consumption may not decrease significantly
Higher minimum price → reduces consumers’ overconsumption caused by negative externalities	Unintended consequences → black markets will sell below minimum price illegally → funding crime
Higher minimum price → firm can make higher profit	Higher price → lower sales → may decrease profits

Go-to points and evaluations for maximum price

Point	Evaluation
Lower, fairer prices → increase consumer surplus and equality	Excess demand → limits access → unfair
Lower prices → stop underconsumption of goods with external benefits	Lower prices → less incentive to invest in quality → quality decreases
Lower prices → stop underconsumption of goods with incomplete information (e.g. not knowing full health benefits of milk so under-consuming)

Go-to points and evaluations for indirect tax

Point	Evaluation
If tax set = size of external cost → will internalise negative externality	Difficult to quantify external cost → so difficult to set right size for tax
Tax increase price of goods → reduces overconsumption because of incomplete information (e.g. not knowing health costs of cigarettes)	Inelastic demand → tax won’t reduce overconsumption
Tax raises tax revenue	Black markets

Go-to points and evaluations for state provision

Point	Evaluation
Solves the free-rider problem	Opportunity cost: state provision is expensive and means the government can’t spend in other areas; worsening its budget deficit.
State provision stops underconsumption of goods (which might occur because of external benefits or information gaps)	Admin costs: government is not a profit-maximiser → no profit incentive → so it will let its admin costs (like paperwork) rise too high
Lower, fairer prices → improves consumer surplus and equality