| Front | Back | | --- | --- | | A government imposes a price ceiling below the equilibrium price. Predict the effect on: (a) quantity demanded, (b) quantity supplied, and (c) market shortage or surplus. |

(a) Quantity demanded increases.
(b) Quantity supplied decreases.
(c) A chronic shortage (excess demand) is created.

| |

Using the price ceiling diagram in Figure 2, identify the areas representing: (a) Consumer Surplus after the ceiling, (b) Producer Surplus after the ceiling, and (c) Welfare Loss.

(a) Consumer Surplus = $a + b$
(b) Producer Surplus = $c$
(c) Welfare Loss = $d + e$

| | Allocative efficiency is achieved in a market when Marginal Benefits are equal to Marginal Costs. | Allocative efficiency is achieved in a market when Marginal Benefits are equal to Marginal Costs. | | A government imposes a price floor above the equilibrium price. Predict the effect on: (a) quantity demanded, (b) quantity supplied, and (c) market shortage or surplus. |

(a) Quantity demanded decreases.
(b) Quantity supplied increases.
(c) A chronic surplus (excess supply) is created.

| | To successfully maintain a price floor at $P_{floor}$ without the price falling back to equilibrium, what action must the government take regarding the surplus? | The government must purchase the surplus (which shifts the demand curve to the right, $D \to D_{gov}$). | |

In Figure 5, what areas represent the total Welfare Loss ($WL$) to society after the price floor is implemented and the government buys the surplus?

| The welfare loss is represented by the areas $d + e + f + g$. | | In a labor market diagram with a minimum wage (price floor), identify who represents the: (a) producers (supply curve) and (b) consumers (demand curve). |

(a) Producers = Workers (who supply labor).
(b) Consumers = Employers (who demand labor).

| | A specific indirect tax is imposed on a producer. Predict the effect on: (a) cost of production, (b) supply curve position, and (c) quantity demanded at the new equilibrium. |

(a) Cost of production increases.
(b) Supply curve shifts upwards/leftwards by the exact amount of the tax.
(c) Quantity demanded decreases.

| | Contrast how a specific tax and an ad-valorem tax shift the market supply curve. |

Specific tax: Shifting the curve parallel upwards.
Ad-valorem tax: Shifting the curve in a pivotal manner (steeper), because the tax is a percentage of the price.

| | A specific tax is a fixed amount per unit sold, whereas an ad valorem tax is a percentage of the product's price. | A specific tax is a fixed amount per unit sold, whereas an ad valorem tax is a percentage of the product's price. | |

Using Figure 8, state the formula/area that represents the total tax revenue earned by the government after the indirect tax is imposed.

| The area is represented by the rectangle $(P_c - P_p) \times Q_{tax}$. | | The government grants a subsidy to dairy producers. Predict the effect on: (a) supply curve position, (b) price paid by consumers, and (c) price received by producers. |

(a) Supply curve shifts rightwards/downwards.
(b) Price paid by consumers decreases ($P_c < P_e$).
(c) Price received by producers increases ($P_p > P_e$).

| |

According to Figure 10, how is the total cost of the subsidy paid by the government calculated?

| $(P_p - P_c) \times Q_{sub}$ (the subsidy per unit multiplied by the new quantity). | | Why does a subsidy cause an overallocation of resources (allocative inefficiency) in a market? | It increases production to a level ($Q_{sub}$) where the marginal cost of producing the extra units exceeds the marginal benefit to consumers ($MC > MB$). | | Why might a government choose direct provision of a service (like healthcare or education) rather than relying on private markets? |

To correct market failures.
To ensure services are affordable and universally accessible.
To maintain high quality for public welfare.

| | Two primary challenges of direct provision of services are government inefficiency due to lack of competition, and high opportunity cost of using tax revenue. | Two primary challenges of direct provision of services are government inefficiency due to lack of competition, and high opportunity cost of using tax revenue. | | State two major economic disadvantages of using command and control regulations (like emission limits) to alter market outcomes. |

High monitoring and enforcement costs (funded by tax revenue).
Significant time lags for regulations to be approved and implemented.

| | Why are consumer nudges considered a highly beneficial intervention method compared to regulations or taxes? |

They preserve individual freedom of choice without mandates.
They are highly cost-effective, saving scarce government budgets.

| | A nudge influences consumer decisions in a desirable way without offering financial incentives or imposing legal regulations. | A nudge influences consumer decisions in a desirable way without offering financial incentives or imposing legal regulations. | |

| P1 | |

| Welfare | |

| Q3 | |

| P_e | |

| b | |

| a | |

| WL | |

| e | |

| c |

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 2.7.2 Main Forms of Government Intervention in Markets Flashcards

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

Flashcards for 2.7.2 Main Forms of Government Intervention in Markets

Flashcards for 2.7.2 Main Forms of Government Intervention in Markets - IB