The Effects of Government Intervention in Markets
Nancy Hill
8 min read
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Study Guide Overview
This study guide covers government intervention in markets, focusing on price controls (price ceilings and floors) and excise taxes. It explains how price ceilings cause shortages, price floors cause surpluses, and excise taxes shift the supply curve. The guide also explains tax incidence and how elasticity of supply and demand determines who bears more of the tax burden. It includes practice questions and emphasizes graphing these concepts.
#AP Microeconomics: Government Intervention Study Guide
Welcome! This guide is designed to help you ace the AP Microeconomics exam by focusing on key concepts related to government intervention in markets. Let's get started!
#Markets and Government Intervention
In microeconomics, a market is where buyers and sellers interact. The government can influence these markets through price controls and taxes. Understanding these interventions is crucial for the exam. Let's dive in!
#Price Controls: Ceilings and Floors
Government-imposed price controls can alter market outcomes. These controls come in two main forms: price ceilings and price floors.
#Price Ceilings
A price ceiling is a maximum legal price. It's only effective if set below the equilibrium price. Think of it as a 'ceiling' that the price can't go above. A classic example is rent control.
Price ceilings lead to shortages because the quantity demanded exceeds the quantity supplied at the controlled price. This creates deadweight loss.
- Graph Explanation:
- Pc is the price ceiling.
- The area below the demand curve and above the price ceiling up to Qs represents consumer surplus.
- Producer surplus is reduced due to the lower price and quantity.
- The triangle formed by the original equilibrium and the new quantities represents deadweight loss.
#Price Floors
A price floor is a minimum legal price. It's only effective if set above the equilibrium price. Think of it as a 'floor' that the price can't go below. A common example is the minimum wage.
Price floors lead to surpluses because the quantity supplied exceeds the quantity demanded at the controlled price. This also creates deadweight loss.
- Graph Explanation:
- Pf is the price floor.
- The area below the demand curve and above the price floor up to Qd represents consumer surplus.
- Producer surplus is reduced due to the lo...
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