1.3 Government Intervention

Nota:

• Can be treated as an additional cost of production

1. Reasons to impose taxes
   1. Government Revenue Collection
   2. Attempt to decrease consumption of goods

      Nota:

      • e.g. cigarettes, alcoholic drinks, etc.
   3. Trade Protection*

      Nota:

      • * See more in International Trade section
2. Consequences
   1. Decrease Qs and Qd
      1. Output and Consumption Shrink
   2. Create Revenues for Government
   3. Firm's Average Revenue Decrease
   4. Resource Misallocation + Welfare Loss
3. Tax Incidence
4. Percentage Tax

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

Nota:

• Where government attempt to set a price above or below an equilibrium price when the market price is unsatisfactory

1. Price Ceilings/ Max. Prices

   Nota:

   • Example: - Food price control - Rent control
   1. Consequences
      1. Creates Shortage
         1. May encourage/ introduce Black Markets

            Nota:

            • 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
         2. Rationing Mechanism

            Nota:

            • Mitigate the shortage problem for consumers
            1. First-Come-First-Serve
            2. Seller's Consumer-Bias

               Nota:

               • Products may be allocated on the basis of who the consumer is (e.g. regular consumer?)
            3. Random Bases
            4. Coupons
      2. Lower prices for consumers
         1. More Accessible for lower-income classes
      3. Government must encourage supply

         Nota:

         • Decrease the shortage issue
      4. Affects the Supply of Firms
      5. May lead to a decrease in product quality
2. Price Floors/ Min. Prices

   Nota:

   • Examples:  - Price support for farmers - Minimum Wage Policy
   1. Consequences
      1. Firms
         1. Increase in Revenue
            1. May encourage overproduction

               Nota:

               • Which means resource misallocation
               1. Creates Surplus
         2. More protected (in terms of farmer's wages
      2. Consumers
         1. Worse off due to increase in prices

            Nota:

            • Takes a larger % of income spent on these goods
      3. Tax-payers burden
      4. Lead to welfare loss
      5. Governments
         1. Rise in opportunity cost