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    4.1 - 4.5 Government Intervention HL RS

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    Syed Haroon
    This document discusses government intervention in markets through taxes, subsidies, price ceilings, price floors, and guaranteed prices. It uses supply and demand diagrams to show how each policy affects consumer surplus, producer surplus, deadweight loss, and market equilibrium. For example, an indirect tax reduces consumer and producer surplus, with some surplus becoming government revenue and some becoming deadweight loss, resulting in underproduction. A subsidy increases both consumer and producer surplus but leads to greater deadweight loss from government spending.

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    © All Rights Reserved
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    4.1 - 4.5 Government Intervention HL RS

    Uploaded by

    Syed Haroon
    20 views18 pages
    This document discusses government intervention in markets through taxes, subsidies, price ceilings, price floors, and guaranteed prices. It uses supply and demand diagrams to show how each policy affects consumer surplus, producer surplus, deadweight loss, and market equilibrium. For example, an indirect tax reduces consumer and producer surplus, with some surplus becoming government revenue and some becoming deadweight loss, resulting in underproduction. A subsidy increases both consumer and producer surplus but leads to greater deadweight loss from government spending.

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    Macroeconomics

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    This document discusses government intervention in markets through taxes, subsidies, price ceilings, price floors, and guaranteed prices. It uses supply and demand diagrams to show how each policy affects consumer surplus, producer surplus, deadweight loss, and market equilibrium. For example, an indirect tax reduces consumer and producer surplus, with some surplus becoming government revenue and some becoming deadweight loss, resulting in underproduction. A subsidy increases both consumer and producer surplus but leads to greater deadweight loss from government spending.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    20 views18 pages

    4.1 - 4.5 Government Intervention HL RS

    Uploaded by

    Syed Haroon
    This document discusses government intervention in markets through taxes, subsidies, price ceilings, price floors, and guaranteed prices. It uses supply and demand diagrams to show how each policy affects consumer surplus, producer surplus, deadweight loss, and market equilibrium. For example, an indirect tax reduces consumer and producer surplus, with some surplus becoming government revenue and some becoming deadweight loss, resulting in underproduction. A subsidy increases both consumer and producer surplus but leads to greater deadweight loss from government spending.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 18

    4.1 – 4.

    5
    Government Intervention

    Impact on Consumer & Producer


    Surplus and DWL
    Paper 3
    Success Criteria
    Producer and Consumer Surplus

    Consumer surplus is the value the consumer gets from


    buying a product, less its price
    • It is the area below the demand curve and above the
    price

    Producer surplus is the value the producer sells a product


    for less the cost of producing it
    • It is the area above the supply curve but below the
    price the producer receives
    Producer and Consumer Surplus

    P Consumer surplus =
    area of blue triangle =
    $10
    ½($5)(5) = $12.5
    9
    8 S
    Producer surplus =
    7
    CS area of red triangle =
    6 ½($5)(5) = $12.5
    5
    4 PS The combination of
    3 producer and consumer
    2 surplus is maximized at
    1 D market equilibrium, i.e
    Q Maximum social welfare or
    0 1 2 3 4 5 6 7 8
    social surplus
    Application: The Effect of an indirect tax

    P S1

    Tax per unit


    CS S
    post tax
    P2

    P1 DWL
    Govt. The indirect results in reduced CS
    Revenue & PS part has become government
    PS post revenue and part has become
    tax D DWL. There is an under allocation
    of resources. (underproduction)
    Q
    Q2 Q1
    Success Criteria
    Application: The Effect of a Subsidy
    S
    P
    Subsidy
    P0
    S1
    Extra PS
    P1 DWL
    Extra CS
    P2
    The subsidy results in greater CS
    and PS. However the loss from
    D government spending is greater
    than the gain in CS+PS. DWL due
    Q to over allocation of resources
    Q1 Q2
    (overproduction)
    Success Criteria
    Application: The Effect of a Price Ceiling
    An effective price ceiling is set below market equilibrium price
    P
    A price ceiling transfers surplus
    from producers to consumers,
    S
    generates deadweight loss, and
    reduces equilibrium quantity
    CS
    P0 DWL

    P1 Price ceiling
    PS
    Shortage D
    Q
    Q1 Q0
    Success Criteria
    Application: The Effect of a Price Floor
    An effective price floor is set above market equilibrium price
    P

    Surplus S
    P1 Price floor

    P0
    A price floor transfers surplus from
    consumers to producers, generates
    deadweight loss, and reduces
    D equilibrium quantity
    Q
    Q1 Q0
    Application: The Effect of a Price Floor with
    government purchases. Guaranteed Price
    (agricultural)
    A guaranteed price
    transfers surplus from
    P
    consumers to
    producers, generates
    deadweight loss, and
    Surplus S reduces equilibrium
    CS
    P1 Price floor quantity. As the
    A government is buying
    P0 C D + govt. up the surplus there is
    extra producer surplus
    (A) but new DWL (B) +
    PS B (C) which are created
    D over standard price
    DWL floor – no guaranteed
    Q
    Q1 Q0 Q2 price
    Paper 3 Practice

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