Advanced Placement Microeconomics analyzing individual economic decision-making.
Taxes and subsidies are tools governments use to influence markets.
When a good is taxed, it becomes more expensive, so people buy less. Taxes can help pay for public services but may reduce market efficiency.
A subsidy is a payment to producers or consumers to encourage more production or consumption. This can make goods cheaper and more available.
The most efficient market outcome happens when total surplus (consumer + producer surplus) is maximized. Taxes and subsidies can cause the market to be less efficient, creating deadweight loss.
Understanding taxes and subsidies helps explain why some goods are expensive, why others are subsidized, and how government actions affect everyday life.
A tax on sugary drinks raises prices, so people buy fewer sodas.
Government subsidies for solar panels lower the cost, encouraging more people to install them.