Chapter 4 Government Intervention (Notes)
Consequence of price ceiling for markets
a. Shortage
=> excess demand
b. Non-price rationing
=> other methods are required to ration (distribute) the goods to consumers
=> e.g. waiting line, first come first serve or favouritism etc
c. Underground (or parallel) markets
=> good is sold at a higher price in black market
d. Under allocation of resource
=> not enough resource allocated to production of goods, resulting in under
production
e. Negative welfare impact
=> producer surplus decreases and consumer surplus increases
Consequence of price ceiling for stakeholders
a. Customers
=> partly gain and partly lose
=> those who buy the good at lower price gain
=> those who cannot buy due to shortage lose
b. Producers
=> worse off
=> lower selling price, revenue decreases
c. Workers
=> worse off
=> some likely to be fired due to fall in output
d. Government
=> may gain political popularity among consumers who are better off due to price
ceiling
Consequence of price floor for markets
a. Surplus
=> excess supply
b. Government measures to dispose surplus
=> government needs to decide what to do with the surplus it purchases
c. Inefficient firm
=> Allow firms with higher cost of production to survive and not try to cut cost
d. Over allocation of resource
=> More is produced than what consumers want
e. Negative welfare impact
=> producer surplus increases and consumer surplus decreases
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Consequence of price floor for stakeholders
a. Customers
=> worse off
=> pay higher price for lower quantity
b. Producers
=> gain
=> higher selling price, revenue increases
c. Workers
=> gain
=> increase in employment due to greater production of good
d. Government
=> worse off
=> opportunity cost as the government buys the excess supply which could have
been spent on other desirable activities in the economy
e. Society
=> worse off
=> due to welfare loss
Consequence of minimum wage for economy
a. Illegal workers
=> Some workers may accept to work for wages below minimum
b. Misallocation of resources in labour market
=> May prevent efficient allocation of labour resources
c. Misallocation of resources in product market
=> Firms using unskilled worker have higher cost of production
Consequence of minimum wage for stakeholders
a. Workers
=> Those receive minimum wage gain
=> Those who unemployed due to minimum wage lose
b. Firms
=> Worse off
=> Due to higher cost of production for paying minimum wage for unskilled workers
c. Consumers
=> Worse
=> Pay higher price for lower quantity
Why government impose indirect tax?
a. A source of revenue
b. A method to discourage consumption of goods that are harmful to individuals
c. Redistribute income
d. Reduce allocative inefficiencies by correcting negative externalities
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Consequence of indirect tax for stakeholders
a. Customers
=> lose
=> pay a higher P and buy lower Q
b. Producers
=> lose
=> receive lower P and sell lower Q
c. Workers
=> loss
=> some likely to be fired due to fall in output
d. Government
=> gain tax revenue
e. Society
=> lose
=> there is resource misallocation and welfare loss
Why government grant subsidy?
a. Increase revenue (hence income) of producers
b. Make certain goods (necessities) affordable to low-income consumers
c. Encourage production and consumption of merit goods
d. Improve allocative efficiencies by correcting positive externalities
Consequence of subsidy for stakeholders
a. Customers
=> gain
=> pay a lower P and buy higher Q
b. Producers
=> gain
=> receive a higher P and sell higher Q
c. Workers
=> gain
=> more is produced, hence more people are employed
d. Government
=> lose
=> must pay subsidy
e. Society
=> lose
=> there is resource misallocation and welfare loss
=> government spending on subsidy, leads to opportunity cost
=> high-cost producers are protected by higher price, leads to inefficiency
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