Effects of Government Intervention in Markets - AP Microeconomics
- Identify one effect of a subsidy on market equilibrium.
- It lowers the price and increases the quantity sold. Subsidy shifts supply right, creating new equilibrium.
- How does a subsidy affect producer surplus?
- It typically increases producer surplus. Subsidies increase producer revenue and profit.
- What causes deadweight loss in a market?
- Price controls, taxes, and subsidies can cause deadweight loss. Government interventions prevent efficient market outcomes.
- What is the incidence of a tax?
- The division of the tax burden between buyers and sellers. Depends on price elasticities of buyers and sellers.
- Analyze the effect of a subsidy on a perfectly inelastic supply.
- Results in a price decrease; no quantity change. Subsidy benefit goes entirely to consumers via price.
- Identify one effect of a price floor on market equilibrium.
- It can create a surplus if set above equilibrium price. Quantity supplied exceeds quantity demanded at floor price.
- What effect does a subsidy have on supply?
- It typically increases supply. Subsidy reduces production costs, shifting supply rightward.
- Identify one effect of a tax on market equilibrium.
- It raises the price and reduces the quantity sold. Tax shifts supply left, creating new equilibrium.
- Find the effect of a price ceiling on a good with inelastic demand.
- Smaller shortage compared to elastic demand. Limited demand response reduces shortage severity.
- What is a price ceiling?
- A maximum price set by the government below equilibrium. Prevents market price from rising to equilibrium level.
- What is a subsidy?
- A payment from the government to producers to encourage production. Reduces producer costs, making production more profitable.
- What is a price floor?
- A minimum price set by the government above equilibrium. Prevents market price from falling to equilibrium level.
- Determine the effect on consumer surplus with a subsidy on production.
- Consumer surplus typically increases. Lower prices from increased supply benefit consumers.
- What role do subsidies play in correcting positive externalities?
- They increase the production or consumption of a beneficial good. Aligns private and social benefits through price incentives.
- What role do taxes play in correcting negative externalities?
- They internalize the external cost, reducing the quantity produced. Pigouvian taxes align private and social costs.
- What is deadweight loss?
- The loss of economic efficiency when equilibrium is not achieved. Represents welfare loss from market distortions.
- How does a tax affect consumer surplus?
- It typically decreases consumer surplus. Higher prices reduce consumer benefit.
- Identify one effect of a price ceiling on market equilibrium.
- It can create a shortage if set below equilibrium price. Quantity demanded exceeds quantity supplied at ceiling price.
- How is tax incidence determined?
- By the relative elasticities of supply and demand. Less elastic side bears greater tax burden.
- What is the result of government setting a price lower than equilibrium?
- A shortage occurs. Price below equilibrium creates excess demand.
- What is the effect of removing a tax on a market?
- Increases equilibrium quantity and decreases price. Returns market to original equilibrium point.
- What is producer surplus?
- The difference between what producers receive and the minimum they would accept. Measures producer benefit from market participation.
- How does a price floor above equilibrium affect producer surplus?
- It typically increases producer surplus. Higher guaranteed price benefits producers despite surplus.
- What is the purpose of a subsidy in a market?
- To encourage production or consumption of a good. Government seeks to correct market failures or support industries.
- Identify the outcome if a tax is imposed on a good with elastic supply.
- Greater tax burden on consumers; price increases. Elastic supply shifts burden toward consumers.
- How does a tax on producers affect market supply?
- Supply curve shifts leftward. Tax adds to production costs, reducing supply.
- What effect does a tax have on supply?
- It typically decreases supply. Tax increases production costs, shifting supply leftward.
- What is an externality?
- A cost or benefit incurred by a third party not involved in the transaction. Spillover effects not reflected in market prices.
- What is a tax on goods?
- A financial charge imposed by the government on a product. Increases production costs for suppliers.
- What happens to equilibrium quantity when a subsidy is introduced?
- Equilibrium quantity typically increases. Lower costs increase production at all price levels.
- Predict the market effect of a tax on inelastic demand goods.
- Greater tax burden on consumers; smaller quantity change. Consumers absorb most tax with limited demand response.
- What is consumer surplus?
- The difference between what consumers are willing to pay and what they actually pay. Measures consumer benefit from market participation.
- Find the tax incidence given elasticity values: demand (0.5), supply (1.0).
- Greater burden falls on consumers with less elastic demand. Less elastic side bears proportionally greater burden.