11 IB Goverment intervention (2)

Government Intervention in Markets

Page 1: Starter Activity

• Explore when markets are unable to meet economic objectives and if government intervention is beneficial.

• Consider use of sticky notes for responses (3 mins).

Page 2: Lesson Objectives

• Definitions:

  • Command and Control: A regulation that sets specific limits or mandates.

  • Price Ceiling: Maximum price set by the government for a good.

  • Rationing: Controlling distribution of scarce resources.

  • Welfare Loss: Loss in community surplus due to inefficient resource allocation.

• Goals: Outline reasons for government market intervention.

Page 3: Definition of Intervention

• Intervention: Any action taken by the government to influence the market outcomes.

Page 4: Concept and Need for Intervention

• Market Strengths and Weaknesses:

  • Markets foster innovation and prosperity but can create issues like inefficiencies.

  • Allocative Efficiency: Not achieved when resources aren't maximized for all participants.

• Types of Government Intervention:

  • Strong Intervention: Bans on goods or production methods.

  • Moderate Intervention: Taxes, subsidies, price controls.

  • Gentle Nudges: Influences consumer behavior indirectly.

Page 5: Types of Intervention

• Categories:

  • Maximum & Taxes

  • Subsidies

  • Minimum Prices

  • State Ownership and Regulation

  • State Funding and Provision

Page 6: Reasons for Government Intervention

• Government Goals:

  • Generate revenue.

  • Support firms and households.

  • Influence production and consumption levels.

  • Correct market failures.

  • Promote equity.

Page 7: Government Revenue

• Purpose of Taxes:

  • Tax consumption to raise revenue.

  • Examples include Value Added Tax (VAT) and Goods and Services Tax (GST) to finance government spending.

Page 8: Supporting Firms

• Intervention Examples:

  • Governments support specific industries for economic/political reasons.

  • Example: Common Agricultural Policy (CAP) providing direct payments to farmers.

Page 9: Supporting Low-Income Households

• Examples of Support:

  • Fuel subsidies in Indonesia also support low-income individuals,

  • Designed to make essential goods accessible.

Page 10: Influencing Production Levels

• Production Control Methods:

  • Discourage undesirable goods production through various governmental strategies.

  • Aimed at mitigating negative societal impacts.

Page 11: Influencing Consumption Levels

• Consumption Control Methods:

  • Discouraging demerit goods consumption due to negative societal impacts.

Page 12: Correcting Market Failure

• Market Failure Definition:

  • Inefficiencies when resources are not allocated effectively.

• Government Actions:

  • Implement taxes to address problems.

  • Enhance consumer information for better choices.

Page 13: Promoting Equity

• Equity Promotion:

  • Interventions designed to improve income distribution,

  • Notably in essential services like healthcare and education.

Page 14: Investigation Activity

• Research interventions in your chosen country focusing on equity in healthcare and education.

Page 15: Price Ceilings

• Definition of Price Ceiling:

  • Government-imposed maximum price to safeguard consumers from high prices.

• Typically utilized for essential goods/services.

Page 16: Aims of Price Ceilings

• Objectives:

  • Increase access to certain goods/services.

  • Protect low-income consumers from monopolistic pricing.

Page 17: Consequences of Price Ceilings

• Potential Issues:

  • Shortages of goods.

  • Rationing complications.

  • Emergence of black markets.

  • Decreased allocative efficiency, thus welfare loss.

Page 18: Lesson Objectives (Indirect Taxes, Subsidies)

• Definitions and examples for indirect taxes.

• Differential impacts of specific vs percentage taxes examined.

• Importance of elasticity in demand and supply analyzed.

Page 19: Advanced Lesson Objectives

• Assess the significance of elasticity in indirect tax impact.

  • Illustrate the effects of taxes mathematically.

Page 20: Advanced Calculation Objectives

• Understand the calculations around subsidies and minimum/maximum prices.

Page 21: Distinction Between Price Controls

• Concepts:

  • Discuss maximum vs minimum price controls and their market effects.

Page 22: Group Discussion

• How can indirect taxes affect consumers, producers, and government? Discussion activity (4 mins).

Page 23: Market Efficiency Understanding

• In a competitive market, equilibrium maximizes community surplus, aiding allocative efficiency (Q*,P*).

Page 24: Consumer and Producer Surplus Effects

• Analyze effects of indirect taxes on surpluses and total welfare.

Page 25: Changes in Producer Surplus

• Graphical Representation:

  • Shift in surplus due to tax imposition.

Page 26: Graphical Examination of Surplus

• Consumer surplus losses analyzed through graphical elements before and after tax.

Page 27: Welfare Loss Due to Tax

• Area of lost social welfare post-tax defined as welfare loss or deadweight loss.

Page 28: Indirect Taxes Definition

• Welfare Loss Concept:

  • Loss of welfare benefits due to inefficient allocation

  • Tax effects illustrated as underproduction and resource misallocation.

Page 29: Self-Assessment Task

• Reflect on your understanding of government intervention regarding your own belief systems.

Page 30: Assessment Question 1

• Identify which statement does not relate to community surplus reduction due to indirect tax.

Page 31: Assessment Question 1 Answer

• Correct response highlights government revenue not impacting welfare loss.

Page 32: Assessment Question 2

• Identify an alternative term for 'welfare loss'.

Page 33: Assessment Question 2 Answer

• Correct answer: deadweight loss.

Page 34: Assessment Question 3

• Determine optimal production condition in society based on social costs and benefits.

Page 35: Assessment Question 3 Answer

• MSC < MSB indicates increased production benefits society.

Page 36: Assessment Question 4 Answer

• Clarification on indirect tax burdens shared between consumers and producers.

Page 37: Assessment Question 5

• Clarification of specific tax differences against ad valorem tax.

Page 38: Assessment Question 5 Answer

• Specific tax as fixed vs. ad valorem tax as percentage-based on good price.

Page 39: Assessment Question 6

• Identify untrue statements regarding indirect taxes' effects.

Page 40: Assessment Question 6 Answer

• Confirm that producer revenue declines post-indirect tax.

Page 41: Assessment Question 7

• Identify why governments typically impose indirect taxes.

Page 42: Assessment Question 7 Answer

• Confirm that taxes discourage rather than promote consumption of taxed goods.

Page 43: Assessment Question 8

• Identify term for harmful goods to society.

Page 44: Assessment Question 8 Answer

• Correct response: demerit goods.

Page 45: Chapter 5 Objectives

• EL explained regarding tax incidence, subsidy effects, stakeholder analyses highlighted.

Page 46: Summary of Objectives

• Objectives reiterated for clarity and focus on elasticity in indirect taxes.

Page 47: Calculating Subsidy Effects

• Examined through linear equations as prior taxes were.

Page 48: Graphical Effect of Subsidy

• Illustrate subsidy impacts on quantities sold.

Page 49: Equations and Variables

• Utilize equations to describe relationships of prices and subsidies.

Page 50: Equilibrium Price Calculations

• Establish methods to find new equilibrium price and quantity post-subsidy.

Page 51: Calculating Equilibrium Examples

• Engage with practical examples of subsidy effects.

Page 52: Simple Calculation Guidance

• Provide structured answers for calculating before/after subsidy impacts.

Page 53: Solving for Equilibrium Price

• Steps defined for algebraic solutions in market dynamics post-subsidy.

Page 54: Consumer Producer Price Dynamics

• Evaluate post-subsidy pricing through comprehensive calculations.

Page 55: Total Cost of Subsidy

• Calculate government costs incurred due to subsidy allocations.

Page 56: Producers' Revenue Changes Post-Subsidy

• Examine financial outcomes for producers following subsidy introduction.

Page 57: Consumer Expenditure Changes

• Total spending alterations due to subsidised price adjustments analyzed for consumers.

Page 58: Plotting Subsidy Effects Results

• Visual representation method for subsidy impacts through graphs.

Page 59: Expenses Analysis for Consumers

• Evaluate the change in consumer spending pre and post-subsidy.

Page 60: Graphing Market Changes

• Identify equilibrium changes graphically with subsidy effects illustrated.

Page 61: Graphical Updates

• Visualize supply shifts due to subsidy allocations.

Page 62: Subsidy Graph Insights

• Analyze new supply curves based on subsidies, aiding market understanding.

Page 63: Effect Summary

• Summarization of outcomes pre and post-subsidy for key variables.

Page 64: Producer Surplus and Consumer Surplus

• Gains measured post-subsidy in monetary terms and diagrammatically represented.

Page 65: Final Subsidy Analysis

• Breakdown of overall outcomes with emphasis on surplus gains and welfare loss.

Page 66: Assessment on Government Cost

• Identify areas in graphs that relate direct costs of subsidies.

Page 67: Assessment Question 2 Analysis

• Confirm true/false statements based on subsidy welfare strains.

Page 68: Condition Assessment Result

• Truth verified regarding net welfare loss expressions in subsidy impacts.