Microeconomics Notes 1.3: Government Intervention

Indirect tax

tax on expenditure that is ‘hidden’. It raises the firm’s costs and shifts the supply curve for the product vertically upwards by the amount of tax.

Specific tax

indirect tax where a specific amount is added to the selling price of each unit. It is represented as a vertically upward, parallel shift of the supply curve.

Ad valorem tax

indirect tax where a percentage is added to the selling price of each unit. It is represented as a vertically upward, divergent shift of the supply curve.

Subsidy

amount of money paid by the government, per unit of output, aiming at lowering costs and increasing the production and consumption of the product. It is represented by a downward shift of the supply curve by the amount of subsidy.

Maximum price (price ceiling)

price usually set by an authority below the equilibrium determined price. Prices are not allowed to rise above this price, and it is aimed at protecting consumers from higher prices. Maximum price may be imposed in markets where the product is a necessity or a merit good. Examples include agricultural and food markets and housing rentals.

Minimum price (price floor)

price usually set by an authority above the market equilibrium price. The market price cannot go below this price, as they are usually implemented to protect producers, particularly those producing essential products. Examples include agricultural products in the EU.