Effects of Government Intervention In Markets

What are the price and quantity controls?

Price ceiling, price floor, and quota

Price Ceiling

A legal upper limit (max) on the price that can be changed in the market

Price Floor

A legal lower limit (min) on the price that can be changed in the market

Quota

A restriction on the qty that can be sold in a market

Deadweight loss

A loss in economic efficiency, lost consumer and producer surplus, represents a lack of allocative efficiency

When does deadweight loss occur?

It occurs when a market is not at competitive equilibrium

What causes deadweight loss?

Government intervention in otherwise efficient markets

Price Floor Graph

Qs-Qd=

Surplus

Price Ceiling Graph

Qd-Qs=

Shortage

Tax

A financial charge a government imposes in a market

Excise Tax

A per-unit tax

Subsidy

A financial benefit given by a government to an individual or a business

Excise tax graph

Pd= Price buyer pays

Ps= Price seller receives

Pd-Ps=Per unit tax

Subsidy Graph

Pd= Price buyer pays

Ps= Price seller receives

Ps-Pd= Per unit subsidy

Tax Burden in the Market