Government Intervention IB Economics

government intervention

represents the actions taken by government to affect the economy

subsidy

A government payment that supports a business or market

price ceiling

A legal maximum on the price at which a good can be sold

price floor

A legal minimum on the price at which a good can be sold

indirect taxes

Taxes levied on spending to buy goods and services, called indirect because payments of some or all of the taxes by the consumer is paid to the government authorities by the firms.

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it

Community Surplus

the sum of consumer and producer surplus; the total benefit to society, this is maximised at the equilibrium.

rent control

a price ceiling on rental housing

shortage

A situation in which quantity demanded is greater than quantity supplied

surplus

A situation in which quantity supplied is greater than quantity demanded

Non-price rationing

The apportioning or distributing of goods among interested users/buyers through means other than price, often necessary when there are price ceilings (maximum prices); may include waiting in line (queues) and underground markets; to be contrasted with 'price rationing', which involves distributing goods among users by means of market-determined prices.

allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

effects of price ceiling

shortages, reductions in product quality, wasteful lines and other search costs, a loss of gains from trade, a misallocation of resources

Effects of Price Floors

Creates a surplus. Inefficiently low quantity - reduces the quantity of goods bought and sold below the market equilibrium quantity. Inefficient allocation of sales among sellers - they would happily sell for less but they can't, and may not sell at all. Wasted resources - sometimes the surplus product is thrown away or destroyed, or sellers put in too much time or effort trying to sell. Inefficiently high quality - sellers try to encourage sales by increasing quality where buyers don't want it. Encourages illegal activity (black labor).