Chapter 6 : Government Intervention

These flashcards cover key concepts and definitions related to government intervention in microeconomics, focusing on price controls, taxes, subsidies, and their effects on markets.

What are the three main reasons for government intervention in a market?

1. Correcting market failures, 2. Changing the distribution of benefits (redistribution), 3. Encouraging or discouraging consumption of certain goods.

What is a price ceiling?

A maximum legal price at which a good can be sold.

What is a price floor?

A minimum legal price at which a good can be sold.

What happens when a price ceiling is set below the equilibrium price?

It leads to a shortage of goods.

How does a price floor affect the quantity supplied and demanded?

It typically results in excess supply, as quantity supplied exceeds quantity demanded.

What are the effects of taxes on sellers?

They decrease supply, raise the price for consumers, decrease quantity sold, and create deadweight loss.

What is the tax incidence?

The distribution of the burden of a tax between buyers and sellers.

What is a subsidy?

A payment from the government to either producers or consumers that lowers the sale price of a good.

How does a subsidy affect the market?

It encourages production and consumption of the good, increasing overall market quantity.

What occurs when a tax is imposed on buyers?

It decreases demand, raises prices paid by buyers, and lowers prices received by sellers.

What is deadweight loss?

The loss of economic efficiency that occurs when the equilibrium quantity is not achieved.

What are some adverse effects of price controls such as ceilings and floors?

They can lead to shortages, excess supply, black markets, and rent-seeking behavior.