Economics notes
Topic 3
Government microeconomic intervention
How do the governments intervene?
Governments intervene in markets and the justification is the market failure.
➔ Regulations
◆ Max price
◆ Min price
➔ Taxes
◆ Direct
◆ Indirect
● Ad valorem
● Specific taxes
➔ Subsidies
➔ Government provision
◆ Transfer payments
◆ Direct provision of goods + services
◆ Nationalisation + Privatisation
Regulations
➢ Maximum price : set by govt so that a good doesn't become too expensive to
produce/consume.
○ Below the free
market price
■ Prevent being
ineffective
1
, ○ As price is lower, supply decreases
■ Suppliers - less willing to produce as much
■ Consumers now demand more at the price level
■ Producers receive less profit
➢ Minimum price: set by the govt so that a good never falls
below a certain price.
○ Also called Price floors
○ Price increases
■ Causes oversupply
● Govt will have to buy surplus
○ Causes: deadweight welfare loss
■ Occurs when there is difference
between the price the marginal
demander is willing to pay + the
equilibrium price
■ The loss of consumer + producer
surplus
Taxes
➔ Direct :
◆ Paid directly to the govt (cannot be
avoided)
➔ Indirect :
◆ Imposed by the govt to increase
production costs for producers
◆ Producers supply less
● Increases market price
● Demand contracts
◆ Specific taxes: tax per unit
● Demand is perfectly inelastic
● Supply perfectly elastic
● Shaded area : size of the tax paid by the consumer
2
Topic 3
Government microeconomic intervention
How do the governments intervene?
Governments intervene in markets and the justification is the market failure.
➔ Regulations
◆ Max price
◆ Min price
➔ Taxes
◆ Direct
◆ Indirect
● Ad valorem
● Specific taxes
➔ Subsidies
➔ Government provision
◆ Transfer payments
◆ Direct provision of goods + services
◆ Nationalisation + Privatisation
Regulations
➢ Maximum price : set by govt so that a good doesn't become too expensive to
produce/consume.
○ Below the free
market price
■ Prevent being
ineffective
1
, ○ As price is lower, supply decreases
■ Suppliers - less willing to produce as much
■ Consumers now demand more at the price level
■ Producers receive less profit
➢ Minimum price: set by the govt so that a good never falls
below a certain price.
○ Also called Price floors
○ Price increases
■ Causes oversupply
● Govt will have to buy surplus
○ Causes: deadweight welfare loss
■ Occurs when there is difference
between the price the marginal
demander is willing to pay + the
equilibrium price
■ The loss of consumer + producer
surplus
Taxes
➔ Direct :
◆ Paid directly to the govt (cannot be
avoided)
➔ Indirect :
◆ Imposed by the govt to increase
production costs for producers
◆ Producers supply less
● Increases market price
● Demand contracts
◆ Specific taxes: tax per unit
● Demand is perfectly inelastic
● Supply perfectly elastic
● Shaded area : size of the tax paid by the consumer
2
