1.3 Government Intervention

1.3 Government Intervention

1. Indirect Taxes

   • Can be treated as an additional cost of production
   • Reasons to impose taxes
     • Government Revenue Collection
     • Attempt to decrease consumption of goods
       • e.g. cigarettes, alcoholic drinks, etc.
     • Trade Protection*
       • * See more in International Trade section
   • Consequences
     • Decrease Qs and Qd
       • Output and Consumption Shrink
     • Create Revenues for Government
     • Firm's Average Revenue Decrease
     • Resource Misallocation + Welfare Loss
   • Tax Incidence
   • Percentage Tax

2. Subsidies

   • Reasons
     • Makes the good cheaper
       • More accessible to lower-income households
       • Increasing Demand
     • Support more environmentally friendly products
     • Make a particular good more competitive and attractive abroad
   • Consequences
     • Decrease in government revenue
     • Cheaper Goods
       • Increase Output and Consumption
     • Market Price Decrease

3. Price Controls

   • Where government attempt to set a price above or below an equilibrium price when the market price is unsatisfactory
   • Price Ceilings/ Max. Prices
     • Example: - Food price control - Rent control
     • Consequences
       • Creates Shortage
         • May encourage/ introduce Black Markets
           • Since there is a shortage caused by price ceilings, those who cannot access these goods in the legal goods may access them in the Black Markets
         • Rationing Mechanism
           • Mitigate the shortage problem for consumers
           • First-Come-First-Serve
           • Seller's Consumer-Bias
             • Products may be allocated on the basis of who the consumer is (e.g. regular consumer?)
           • Random Bases
           • Coupons
       • Lower prices for consumers
         • More Accessible for lower-income classes
       • Government must encourage supply
         • Decrease the shortage issue
       • Affects the Supply of Firms
       • May lead to a decrease in product quality
   • Price Floors/ Min. Prices
     • Examples:  - Price support for farmers - Minimum Wage Policy
     • Consequences
       • Firms
         • Increase in Revenue
           • May encourage overproduction
             • Which means resource misallocation
             • Creates Surplus
         • More protected (in terms of farmer's wages
       • Consumers
         • Worse off due to increase in prices
           • Takes a larger % of income spent on these goods
       • Tax-payers burden
       • Lead to welfare loss
       • Governments
         • Rise in opportunity cost