1. Maximum/price ceiling
1.1. general
1.1.1. legal maximum price for a g/s, set below the market equilibrium price
1.1.2. price control set by the government, where they do not want the price to rise above Pmax
1.1.3. rationale: benefit consumers by increasing the affordability of the g/s
1.2. diagram
1.2.1. 1. original equilibrium (P0 x Q0)
1.3. Impact on stakeholders
1.3.1. 1. consumers: benefit from lower prices and greater affordability of g/s
1.3.2. 2. producers suffer due to the reduction in quantity sold. at lower prices, quantity supplied falls from (Q0) to (QS). Fall in producer revenues and producer surplus
1.3.3. 3. society suffers from a reduction in welfare due to a deadweight loss. Assuming the market is previously efficient, it will now be underproducing and under-consuming relative to the equilibrium.
1.4. overall impact
1.4.1. 1. Shortages(QD>QS)
1.4.1.1. quantity demanded exceeds quantity supplied, the market would not be able to achieve equilibrium
1.4.1.1.1. government may use non-price rationing(purchase limits, coupon system) to limit
1.4.2. 2. Non-price rationing
1.4.2.1. auction, one item goes to the highest bitter. 拍卖. balloting system-> consumers are allocated at random or by forcing consumers to queue to obtain the good on a first-come-first-serve basis.
1.4.2.1.1. lead to corruption and favoritism because the people in charge could be incentivised to favour their friends or family
1.4.3. 3. underground/black markets
1.4.3.1. At QS, consumers are willing to pay up to P1(which is illegal price level) to obtain scarce g/s.
1.4.3.2. arise when consumers buy the good legally at Pmax with a lower price and illegally resell in at P1 for more profit
1.4.4. 4. under-allocation of resources
1.4.5. 4. negative welfare impacts
2. Indirect tax
2.1. consequences
2.1.1. 1. producers: suffer from lower revenues as they receive a lower price and sell a smaller amount of output
2.1.2. 2. consumers: suffer from higher prices and the consumption of a lower amount of output
2.1.3. 3. government: benefit from a rise in tax revenue
2.1.4. 4. workers: rise in unemployment as the demand for workers fall with lower equilibirum output
2.1.5. 5. society: fall in social welfare if the market were originally efficient due to the under-allocation of resources
2.1.5.1. social welfare can be improved if the market were originally inefficient and over-allocated resources
2.2. General
2.2.1. tax consumers incurred(eg. taxes on tobacco, alcohol). specific tax is a type of indirect tax that is set at a fixed amount
2.2.2. imposed on spending to buy g/s raising cost of production and lowering market supply(consumers suffer from tax and higher prices)
3. Subsidy
3.1. cash payment by the government to firms to help them lower their cost of production
3.2. impact:
3.2.1. producers: benefit from higher revenues as they receive a higher price and sell a greater amount of output
3.2.2. consumers: benefit from lower prices and consumption of greater amount of output. increase utility
3.2.3. Government: suffer from a rise in government expenditure
3.2.3.1. measure by the vertical distance of per unit subsidy and the quantity
3.2.3.2. worsen government budget and incur opportunity cost, forced to forgo spending on other areas
3.2.4. Workers: fall in unemployment as the demand for workers rise with the high equilibrium output
3.2.4.1. firms demand more, hirer more workers to produce more output, increase employment overall
3.2.5. society suffers from a fall in social welfare if the market were originally efficient, due to over-allocation of resources
3.2.5.1. society welfare can improve if the market were originally inefficient and under-allocated resources.
3.3. Diagram
3.3.1. 1. original equilibrium at (P0 x Q0)
3.3.2. 2. supply curve parallel shift right (S1=S0 + Subsidy) vertical distance between P2 and P1 representing per unit subsidy(certain $)
3.3.3. 3. new equilibrium at (P1 x Q1)