Government Intervention

- Taxes & Subsidies

- Price Controls

Dr M Manjunath Shettigar
MA (Econ), MBA, MPhil, PhD

Professor,
Department of Professional Studies,
Christ University,
Bangalore - 560029
Government intervention

Taxes and Subsidies

Government intervention
- imposing tax
Government intervention
- imposing tax
Government intervention
- imposing tax
Government intervention
- imposing tax
Consequences of tax
Effect on consumers
Higher price & smaller quantity of consumption, loss of welfare
(consumer surplus)
Effect on producers
Lower price & less revenue, loss of welfare (producer surplus)
Effect on government
Higher revenue, better budgetary conditions
Effect on workers
Less employment
Effect on society as a whole
Loss welfare, misallocation of resources
Government intervention
- giving subsidy
Government intervention
- giving subsidy
Government intervention
- giving subsidy
Consequences of subsidy
Effect on consumers
Lowe price & larger quantity of consumption, increase in
welfare (consumer surplus)
Effect on producers
Higher price & larger revenue, increase in welfare (producer
surplus)
Effect on government
Increase in government spending, poor budgetary conditions
Effect on workers
More employment
Effect on society as a whole
Deadweight loss, misallocation of resources
Price controls
Price controls refer to the setting of
minimum or maximum prices by the
government
the intention is either ensuring some
minimum price for the producers or some
maximum price for the buyers.
Price controls result in market
disequilibrium, and therefore in shortages
(excess demand) or surpluses (excess
supply)
Price ceiling (maximum
price) and market outcomes
Price ceiling refers to a legally determined
maximum price.

It means that price that the sellers can charge for

the good can not be more that fixed by the
government
Price ceiling (maximum
price) and market outcomes
Price ceiling (maximum
price) and market outcomes
Example:

Rentcontrols
Food price controls
Consequences of price
ceiling
Shortages
Non-price rationing
Underground/ Black market
Allocative inefficiency
Negative welfare impacts
Welfare loss
Consequences of price ceiling
Effect on consumers
Consumers who are able to buy at govt fixed price benenfit &
those who cannot buy because of shortage of goods are
adversely affected.
Effect on producers
Less sales & less revenue, loss of welfare (producer surplus)
Effect on government
No gain, no loss. But its popularity may increase.
Effect on workers
More employment
Effect on society as a whole
Loss welfare, misallocation of resources
Price floor (minimum price)
and market outcomes

Price floor refers to a legally set minimum price for

a product.
it means that the price that can be charged by
the sellers of a good must not be lower than the
price floor or the minimum price
Price floor (minimum price)
and market outcomes
Price floor (minimum price)
and market outcomes
Example:

Support prices (for farm

produces)
Minimum wages (for
workers)
Consequences of price
floors
Surpluses
Government intervention to dispose of surplus
Firm inefficiency
Allocative inefficiency
Negative welfare impacts
Welfare loss