Notesale: Turn your study into money

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Government intervention
Indirect taxes are taxes on goods and services
included in their selling price
...


consumption; e
...
cigarettes, alcohol,
petrol
...


Specific taxes are a fixed amount on the unit
of the good
...


D
0

Q2

Q1

Q

Ad valorem taxes are a percentage of the
price
...

If

S + tax

P

Þ   Market prices rise
Þ   Equilibrium quantity decreases
Þ   Output and consumption of the good
therefore decreases
Þ   Producers’ total revenues decrease
Þ   Government tax revenue increases

PED > PES
PED = PES

S

PES > PED
PES = 0
PED = 0
PES = ∞
PED = ∞

Then the tax incidence
On consumers is > on producers
Is split between consumers and
producers
On producers > on consumers
Is 100% burdened by producers
Is 100% burdened by consumers
Is 100% burdened by consumers
Is 100% burdened by producers

Tax incidence showed in a diagram
0  

Q
S+tax
P

S

Why would a government impose a tax?
Þ   Revenue collection – Gov
...
Taxation is a
way of collecting revenues
...

S

P

S + subsidy

Maximum price (price ceiling) – Price
control imposed by the government at a price
below the market equilibrium
...
g
...

Examples include health-care, educationrelated goods, and eco-friendly goods
...

Þ   Competitiveness – A subsidy could make
a particular good more competitive abroad
and help increase export revenue
...


Examples of price ceilings include food price
controls (e
...
corn flour, sugar, oil in
Venezuela) and rent controls
...


To protect consumers, for example:
•   Maximum food price controls to ensure
low-cost food for the poor
...

Consequences of a price ceiling on
stakeholders

Examples of minimum prices include
minimum wage in the labour market
...

While it may increase the affordability of
goods or services for consumers, particularly
beneficiary for low-income households, a
maximum price can lead to shortages and may
give rise to parallel underground markets
...

Government spending may also have to
increase to solve consequences caused by
price ceilings (opportunity cost), such as
subsidise or provide the good directly to shift
supply to the right and reduce the shortage
...
g
...

Why would a government impose a price
floor?
To protect producers, for example:
•   Minimum prices to protect the agricultural
industry
•   Minimum wages to protect workers; this
ensures a reasonable wage for the work
force

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