The Effects of Government Intervention in Different Market Structures

Causes of inefficient markets

• Market power

• Externalities

• Nonrival and nonexcludable goods (public goods)

Forms of government intervention

• Taxes

• Subsidies

• Price floors/ceilings

• Regulation

Per unit subsidy : gives benefits per unit

• Perfect competition : MC, ATC, AVC decreases, price doesn’t change (price taker)

• Monopolistic competition : MC, ATC, price decreases (price maker @ MR=MC)

Lump sum subsidy : gives benefit no matter how many units

Taxes will always shift supply curve to the left in long run, profits decrease

Per unit tax : increase MC, ATC, and AVC

• Perfect competition : MC, ATC, AVC increases, price doesn’t change (price taker)

• Monopolistic competition : MC, ATC, price increases (price maker @ MR=MC)

Lump sum tax : only increase ATC; won’t change output level

Non price regulation : works like taxes, they ensure competition/environmental protection/health and safety

Antitrust policy : promote competition and prevents monopolies

Antitrust laws

• Lawsuits

• Price controls

• Subsidies

Price ceiling : sets minimum price

• Perfect competition : causes shortage

• Monopolistic competition : becomes MR curve, price and output decreases

Price floor : sets maximum price

• Perfect competition : leads to surplus

• Monopsony : wages go up and workers go up