Government Intervention

Indirect Tax

A tax levied on goods or services rather than consumers or companies.

Two types of indirect tax

• Ad Valorem

• Tax per unit

Indirect tax

Things to mention when analyzing a graph

• P&Q

• Government revenue

• Consumer burden

• Producer burden

• DWL

Deadweight Loss

Loss in the total value of trades that could’ve occurred but didn’t because sometehing interferred with the market.

PED > 1 and Tax

• Consumer burden: Lower

• Producer burden: higher

• Government revenue: higher

PED < 1 and Tax

• Consumer burden: Higher

• Producer burden: Lower

• Government revenue: Higher

Subsidy

Money granted to firms by the government to reduce costs of production and encourage increase in output

Deadweight loss in subsidies

Area that represents the trades that only happen because of the subsisdy, but shouldn’t from a societal point of view.

Subsidy

Minimum Price

A fixed price (price floor) enacted by the government usually set above the equilibrium.

Reasons for minimum price

• Protect producers from price votality

• Solve market failure

Intervention buying

When the government buys the excess supply generated by the price floor.

Price floor

Maximum Price

Doesn’t allow producers to sell at a higher price than that.

Reason for a price ceiling

To increase affordability of necessity goods/services

Price Ceiling