Micro economics chapter 11 (Government intervention)

What are three good reasons for the government to intervene?

1. Redistribution of income

2. Discourage the production of a particular good that involves pollution

3. Collect tax money to finance public goods

What are market-conform interventions?

Market-conform interventions are government actions that align with the market mechanisms, such as subsidies or taxes, that aim to enhance efficiency and promote equitable outcomes without significantly distorting market forces.

What are non-market-conform interventions?

Non-market-conform interventions are government actions that disrupt market mechanisms, such as price controls, quotas, or regulation that do not align with supply and demand dynamics.

What do governments do to protect consumers from excessively high prices?

They impose a maximum price

What are 4 ways to eliminate excess demand in case of a maximum price?

1. Black market (some want to pay more and that’s fine)

2. Rationing (you can only buy certain amount)

3. Queues (first come first serve)

4. Priority criteria (based on ex. Household size or income)

What is job search cost?

Job search cost refers to the time, effort, and resources expended by individuals while looking for a job, including expenses related to travel, resume preparation, and interviews.

What does quota mean?

Restrictions on quantities traded

What is an excise tax?

An excise tax is a specific tax levied on the sale of certain goods, such as alcohol, tobacco, and gasoline, usually included in the price of the product.

What is a value tax?

A value tax is a tax based on the value of a product or service, often assessed as a percentage of the sale price, typically applied to goods and services.

What’s the difference between direct taxes and indirect taxes?

Direct taxes are imposed directly on individuals or organizations and are paid directly to the government, such as income tax. Indirect taxes are imposed on goods and services and are collected by intermediaries, such as sales tax or VAT.

What’s the incidence of a tax?

The incidence of a tax refers to the distribution of the tax burden between buyers and sellers, determining who ultimately bears the cost of the tax.

Who pays for the tax on a perfectly inelastic demand curve?

Buyer

Who pays for the tax on a perfectly elastic demand curve?

Sellers

What is distortion that a tax induces?

The economic cost of the tax

What does tax equivalence mean?

Tax equivalence refers to the principle that the burden of a tax remains the same regardless of who is legally responsible for paying it, highlighting the effects of tax incidence on both consumers and producers.