AS Micro Government Intervention

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AS Micro Government Intervention

  1. 1. AS Micro GovernmentIntervention in Markets
  2. 2. • Indirect taxes on producers (affecting supply) • Indirect taxes on consumers (affecting Taxes demand) • Subsidies to consumers • Subsidies to producers • Guaranteed minimum prices toSubsidies producers
  3. 3. • Minimum wages • Price capping / ceilings (i.e. maximum Price prices) controls • Buffer stock agency schemes • Prohibition of sale • Minimum legal ages for consumption • State ownership of businessesRegulation (nationalisation)
  4. 4. Buffer Stocks – Do They Work?
  5. 5. How might a buffer stock help tostabilise prices in the cocoa market? Price of Cocoa Planned Supply Upper Upper Target Target Price Lower Lower Target Target Price Market Demand Quantity
  6. 6. A rise in market supplyPrice of Cocoa Actual Planned Supply Supply Upper Upper Target Target Price Lower Lower Target Target Price Market Demand S1 Quantity
  7. 7. A rise in market supplyPrice of Cocoa Actual Planned Supply Supply Upper Upper Target Target Price Lower Lower Target Target Price Market Demand S1 Quantity
  8. 8. A rise in market supplyPrice of Cocoa Actual Planned Supply Supply Upper Upper Target Target Price Lower Lower Target Target Price Excess supply at Market this price Demand Q1 S1 Quantity
  9. 9. A rise in market supply Demand withPrice of purchases Cocoa Actual Planned Supply Supply Upper Upper Target Target Price Lower Lower Target Target Price Market Demand Q1 S1 Quantity
  10. 10. A rise in market supply Demand withPrice of purchases Cocoa Actual Planned Supply Supply Upper Upper Target Target Price Lower Lower Target Target Price Cost of buying up Market stocks Demand Q1 S1 Quantity
  11. 11. The case for price stabilisation Lower risk of food poverty More stable incomes and profits for farmers Macroeconomic stability Buffer stock ought to be self-financing
  12. 12. Limitations of buffer stock schemes Buffer may not be large enough to change price High intervention price leads to rising surpluses Costs of storage and falling quality of product Might be better long run measures for farmers
  13. 13. Welfare Effects of a Tax and a Subsidy Supply post taxCosts and Benefits Supply pre tax A Demand B Output
  14. 14. Welfare Effects of a Tax and a Subsidy Supply post tax Costs and BenefitsConsumer Supply pre tax B pays B A Supplierreceives C C Demand B Output
  15. 15. Welfare Effects of a Tax and a Subsidy Supply post tax Costs and BenefitsConsumer Supply pre tax B pays B A Supplier Tax revenuereceives C C Demand B Output
  16. 16. Welfare Effects of a Tax and a Subsidy Supply post tax Costs and BenefitsConsumer Supply pre tax B pays B A Supplier Tax revenuereceives C C Demand B Output
  17. 17. Welfare Effects of a Tax and a Subsidy Supply post tax Costs and Consumer Benefits burdenConsumer Supply pre tax B pays B A Supplier Tax revenuereceives C C Demand B Output
  18. 18. Welfare Effects of a Tax and a Subsidy Supply post tax Costs and Consumer Benefits burdenConsumer Supply pre tax B pays B A Supplier Tax revenuereceives C C Demand B Output
  19. 19. Welfare Effects of a Tax and a Subsidy Supply post tax Costs and Consumer Benefits burdenConsumer Supply pre tax B pays B A Supplier Tax revenuereceives C C Demand B Output Producer burden
  20. 20. Quick Test!An indirect tax on theproduction of a good will If elasticity of demand forhave no effect on price if a product is (-) 0.4 thenthe price elasticity of the majority of thedemand is? _________ burden of a tax on the producer will be paid by the _________________ In the event of a new tax on a product, the price will rise by the full amount of the tax when the price elasticity of demand is ___________
  21. 21. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? _________
  22. 22. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? Infinity
  23. 23. Quick Test!An indirect tax on theproduction of a good will If elasticity of demand forhave no effect on price if a product is (-) 0.4 thenthe price elasticity of the majority of thedemand is? Infinity burden of a tax on the producer will be paid by the
  24. 24. Quick Test!An indirect tax on theproduction of a good will If elasticity of demand forhave no effect on price if a product is (-) 0.4 thenthe price elasticity of the majority of thedemand is? Infinity burden of a tax on the producer will be paid by the Consumer
  25. 25. Quick Test!An indirect tax on theproduction of a good will If elasticity of demand forhave no effect on price if a product is (-) 0.4 thenthe price elasticity of the majority of thedemand is? Infinity burden of a tax on the producer will be paid by the Consumer In the event of a new tax on a product, the price will rise by the full amount of the tax when the price elasticity of demand is ___________
  26. 26. Quick Test!An indirect tax on theproduction of a good will If elasticity of demand forhave no effect on price if a product is (-) 0.4 thenthe price elasticity of the majority of thedemand is? Infinity burden of a tax on the producer will be paid by the Consumer In the event of a new tax on a product, the price will rise by the full amount of the tax when the price elasticity of demand is ZERO
  27. 27. Welfare effects of a subsidyCosts and Benefits Supply pre subsidy A Supply post subsidy Demand B Output
  28. 28. Welfare effects of a subsidyCosts and Benefits Supply pre subsidy A Supply post subsidy C Demand B D Output
  29. 29. Welfare effects of a subsidy Costs and Benefits Supply pre subsidy Supplier Ereceives C A Supply post subsidyConsumer C pays B Demand B D Output
  30. 30. Welfare effects of a subsidy Costs and Benefits Supply pre subsidy Supplier Ereceives C A Supply post subsidyConsumer C pays B Subsidy payment Demand B D Output
  31. 31. A subsidy when demand is price elastic Price Supply pre subsidy A Supply post subsidy Demand B Output
  32. 32. A subsidy when demand is price elastic Price Supply pre subsidy A Supply post subsidy D Demand B C Output
  33. 33. A subsidy when demand is price elastic Price Supply pre subsidy E A Supply post subsidy D Demand B C Output
  34. 34. A subsidy when demand is price elastic Price Supply pre subsidy E A Supply post subsidy D Demand B C Output
  35. 35. A subsidy when demand is price elastic Price Supply pre subsidy E A Supply post subsidy D Demand Elastic demand – so a subsidy causes a large rise in quantity demanded B C Output

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