**** When a government **alters** the **resource** **allocation** that **markets** would have achieved working **freely** on their own. 1. **Governments** **intervene** in markets using different methods to **influence demand **and** supply, **thereby **shaping** **market** **outcomes**. 2. The main forms of **government intervention **are: 1. **Price controls: ** 1. **Price ceilings.** 2. **Price floors.** 2. **Indirect taxes and subsidies** 3. **Direct provision of services** 4. **Command and control regulation and legislation** 5. **Consumer nudges (HL only)** ## Price controls: price ceilings (maximum prices) and price floors (minimum prices) [3e9414d528b6] Refers to the setting of a **maximal**/**minimal** **price** **above**/**below** the **equilibrium** **price** by the **government**. 1. **Governments **set** price controls** to not allow **markets** to reach their **natural** **equilibrium.** 2. By setting **price controls**, governments force **disequilibrium** in the market, thus creating: 1. **Shortages (excess demand)** 2. **Surpluses (excess supply)** ### Price ceilings (maximum prices) [block_4] A **maximum price**, **below the equilibrium price**, set by the government for a particular good or service. 1. The imposition of a **price ceiling** ensures that the **price** at which **sellers are allowed to sell a good **cannot exceed the **maximum price** set by the **ceiling**. 2. **This government-imposed limit** prevents prices from rising above a specific level for the good or service in question. ![](https://cdn.sanity.io/images/w7j7fz60/production/aa0572eddd29c1aed41b8034ef5a57a70409e1c6-2292x1876.png) 1. As it can be seen in _Figure 1_, at the initial **equilibrium price** (**$P_1$**) there is a quantity of **$Q_1$** bread demanded. After the **price ceiling ($P_{ceiling}$)** is imposed: 1. The **quantity demanded increases** to **$Q_3$**, while the q**uantity supplied decreases** to **$Q_2$.** 2. Meaning that the **market demand is higher than the market supply**, hence a **shortage of $Q_3-Q_2$.** ![](https://cdn.sanity.io/images/w7j7fz60/production/786ceaa4c73d04e7fd22b4bd19b63c80fd080d2d-2338x1813.png) As it can be seen in _Figure 2_: 1. **Before the price ceiling**: 1. **Consumer surplus** = $a+d$ 2. **Producer surplus** = $b+c+e$ 2. **After the price ceiling** 1. **Consumer surplus =** $a+b$ 2. **Producer surplus** = $c$ Therefore there is a **welfare loss (WL)** of the **areas $d+e$**. 1. This is the amount of **social welfare (surplus) **lost due to **resource misallocation **arising from the **price ceiling.** 2. Remember** allocative efficiency **is achieved when **Marginal benefits (MB) = Marginal Costs (MC).** [{"_key":"038a94bb59fb","_type":"block","asset":null,"children":[{"_key":"978f2cb81eaa","_type":"span","marks":[],"text":"Remember the meaning of the "},{"_key":"a230a1a99c7a","_type":"span","marks":["strong"],"text":"marginal benefits (MB)"},{"_key":"913782f639a5","_type":"span","marks":[],"text":" and the "},{"_key":"fd4ac410f5a9","_type":"span","marks":["strong"],"text":"marginal costs (MC)"},{"_key":"998207a280cd","_type":"span","marks":[],"text":" mentioned in "},{"_key":"258264c1b3cf","_type":"span","marks":["em"],"text":"Figure 2"},{"_key":"970a5dfb83f3","_type":"span","marks":[],"text":":"}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"1d8accae2e1f","_type":"block","asset":null,"children":[{"_key":"86c4b7ec2fdb","_type":"span","marks":["strong"],"text":"Marginal Benefits (MB)"},{"_key":"8a07592319c5","_type":"span","marks":[],"text":": The 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present"}],"markDefs":[],"style":"normal"},{"_key":"6cf773c202e8","_type":"block","asset":null,"children":[{"_key":"a6af58a0673f0","_type":"span","marks":["strong"],"text":"Where"},{"_key":"a6af58a0673f1","_type":"span","marks":[],"text":": New York City, USA"}],"markDefs":[],"style":"normal"},{"_key":"5dcbd23f1ee2","_type":"block","asset":null,"children":[{"_key":"3006590cf2ec0","_type":"span","marks":["strong"],"text":"What"},{"_key":"3006590cf2ec1","_type":"span","marks":[],"text":": Rent control policies were introduced to cap rental prices on certain apartments, aiming to ensure affordable housing."}],"markDefs":[],"style":"normal"},{"_key":"6448771e61b5","_type":"block","asset":null,"children":[{"_key":"3dcb3ab627980","_type":"span","marks":["strong"],"text":"Why"},{"_key":"3dcb3ab627981","_type":"span","marks":[],"text":": To protect tenants, particularly low-income families, from being displaced due to skyrocketing rents in a high-demand housing market."}],"markDefs":[],"style":"normal"},{"_key":"f0245a6a0d42","_type":"block","asset":null,"children":[{"_key":"ada23e8e41e10","_type":"span","marks":["strong"],"text":"So?"},{"_key":"7529cbeaa93d","_type":"span","marks":[],"text":":"}],"markDefs":[],"style":"normal"},{"_key":"0171e47b39f7","_type":"block","asset":null,"children":[{"_key":"68a539d570a10","_type":"span","marks":[],"text":"Rent ceilings kept prices below market rates, allowing many families to stay in their homes."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"2052e2d8cb85","_type":"block","asset":null,"children":[{"_key":"0c84e5e62bb60","_type":"span","marks":[],"text":"Stabilized neighborhoods by reducing tenant turnover."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"928ea47be68f","_type":"block","asset":null,"children":[{"_key":"31aa4ebcd78d0","_type":"span","marks":[],"text":"Provided long-term affordability for tenants in rent-controlled units."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"faef3c0077a7","_type":"block","asset":null,"children":[{"_key":"ebb8c1d5ea41","_type":"span","marks":[],"text":"However, critics argue it disincentivized new construction and maintenance, highlighting both the benefits and trade-offs of price ceilings."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"e568d7128175","_type":"block","asset":null,"children":[{"_key":"9354b22abe9b","_type":"span","marks":[],"text":"Price ceilings creating chronic shortages: Venezuela's commodities"}],"markDefs":[],"style":"h3"},{"_key":"2c1cc06e4130","_type":"block","asset":null,"children":[{"_key":"d55329722a140","_type":"span","marks":["strong"],"text":"When"},{"_key":"d55329722a141","_type":"span","marks":[],"text":": Early 2000s"}],"markDefs":[],"style":"normal"},{"_key":"53f30bb098a3","_type":"block","asset":null,"children":[{"_key":"b9494a11462e0","_type":"span","marks":["strong"],"text":"Where"},{"_key":"b9494a11462e1","_type":"span","marks":[],"text":": Venezuela"}],"markDefs":[],"style":"normal"},{"_key":"dcb0997158f4","_type":"block","asset":null,"children":[{"_key":"d1751926be1b0","_type":"span","marks":["strong"],"text":"What"},{"_key":"d1751926be1b1","_type":"span","marks":[],"text":": The government implemented price controls on essential goods like flour, rice, and cooking oil to make them more affordable."}],"markDefs":[],"style":"normal"},{"_key":"4499c6a8dfec","_type":"block","asset":null,"children":[{"_key":"ec62077220040","_type":"span","marks":["strong"],"text":"Why"},{"_key":"ec62077220041","_type":"span","marks":[],"text":": To help low-income households during economic instability by capping prices of basic commodities."}],"markDefs":[],"style":"normal"},{"_key":"8b5df2e67474","_type":"block","asset":null,"children":[{"_key":"c5c54b4d181c0","_type":"span","marks":["strong"],"text":"So?"},{"_key":"c5c54b4d181c1","_type":"span","marks":[],"text":": "}],"markDefs":[],"style":"normal"},{"_key":"b03ee1ca01c2","_type":"block","asset":null,"children":[{"_key":"513ae57653de","_type":"span","marks":[],"text":"The policy disrupted markets, reducing production and creating inefficiencies. "}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"72c3a3f2efe6","_type":"block","asset":null,"children":[{"_key":"8fb6810283f4","_type":"span","marks":[],"text":"Short-term affordability gains were outweighed by chronic shortages."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"9384c261e808","_type":"block","asset":null,"children":[{"_key":"bebfd8157fee","_type":"span","marks":[],"text":"Increased the population's reliance on costly black markets."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"05031a3dd91e","_type":"block","asset":null,"children":[{"_key":"77ed938d5941","_type":"span","marks":[],"text":"Ultimately, it harmed the very people it aimed to help."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"}] #### Calculating the welfare impacts of price ceilings (HL only) [8bfe7575fb33] [{"_key":"302c4e2d9f1a","_type":"block","asset":null,"children":[{"_key":"56f38245dbee","_type":"span","marks":[],"text":"While the understanding of the "},{"_key":"c7541a96c520","_type":"span","marks":["strong"],"text":"welfare loss"},{"_key":"5ee7d972c245","_type":"span","marks":[],"text":" that arises from "},{"_key":"509a763201b3","_type":"span","marks":["strong"],"text":"price ceilings"},{"_key":"8b1dd5b36ba4","_type":"span","marks":[],"text":" is "},{"_key":"35ea48a06878","_type":"span","marks":["strong"],"text":"SL&HL content"},{"_key":"baac332b461a","_type":"span","marks":[],"text":", the specific calculations is an "},{"_key":"f0251c5fb97c","_type":"span","marks":["strong"],"text":"HL only content"},{"_key":"a2f4b872a4f9","_type":"span","marks":[],"text":". "}],"markDefs":[],"style":"normal"}] In order to calculate the change in **welfare** **impacts** due to price ceiling, we need to look at _Figure 3_: ![](https://cdn.sanity.io/images/w7j7fz60/production/5da9e7df4e95459d77c618575cd7b3db5d7538f0-2338x1813.png) Looking at _Figure 3_ we can see that that the **equilibrium price ($P_e$)** and **quantity** **($Q_e$) **are both equal to 6. Using the information in _Figure 3_ we can calculate: 1. **Consumer expenditure** 1. Consumer expenditure is equal to the **number of units purchased **($Q_e$)** multiplied by the price per unit paid **($P_e$)**. ** 1. So at equilibrium the consumer expenditure is $6 \times 6=36$ 2. After the price ceiling the consumer expenditure is $4 \times 4=16$ 2. **Producer revenue** 1. **Producer revenue is equal to consumer expenditure** 1. So at equilibrium producer revenue is $36\$$. 2. After price ceiling producer revenue is $16\$$. 3. **Consumer surplus (CS) ** 1. **Consumer surplus **is represented by the area **below** **demand** **curve**, and above the **price paid** (up to the quantity purchased). 1. So at equilibrium $CS = a+d = \frac{(10 - 6) \times 6}{2} = 12\$$ 2. After price ceiling $CS = a+b = \frac{((8 - 4) \times 4) + ((10 - 8) \times 4)}{2} = 20\$$ 4. **Producer surplus (PS)** 1. **Producer surplus **is represented by the area **above the supply curve**,** **and below the **price received** by the **producers**. 1. So at equilibrium $PS = b+c+e = \frac{((6 - 2) \times 6)}{2} = 12\$$ 2. After the price ceiling $PS = c = \frac{((4 - 2) \times 4)}{2} = 4\$$ 5. **Welfare loss(WL)** 1. **Welfare loss **is equal to the difference between **social** **surplus** **before** and **after** the **price control**. In _Figure 3_, this is the area marked **$WL$.** 1. $WL = d+e = \frac{((8 - 4) \times (6 - 4))}{2} = 4\$$ ### Price floors (minimum prices) [block_24] A **minimum price** set by the government for a good, **above the equilibrium **price**.** 1. The imposition of a **price floor** ensures that the **price** at which **sellers** are allowed to sell a good **cannot** **fall** **below** the **minimum price** set by the **floor**. 2. This **government**-imposed limit prevents prices from dropping below a specific level for the good or service in question. ![](https://cdn.sanity.io/images/w7j7fz60/production/fa528908e8fd3d41895897ece6346b345b901744-2292x1876.png) 1. As it can be seen in_ Figure 4_, at the initial **equilibrium price** (**$P_e$**) there is a **quantity** **$Q_e$** being **demanded**. 2. After the **price floor ($P_{floor}$)** is imposed: 1. The **quantity demanded decreases** to **$Q_d$**, while the **quantity supplied increases** to **$Q_s$.** 2. This creates a situation where the **market supply is higher than the market demand**, hence a **surplus of $Q_s-Q_d$.** 3. This spare **surplus** that **consumers** are **not** **willing** **and** **able** to **buy** is then **bought by the government**. Then, the **government** either: 1. **Stores the surplus.** 2. **Exports the surplus.** 4. When the government buys the excess supply, the **demand **for the good/service increases,** shifting the demand curve to the right ($D → D_{gov}$).** [{"_key":"34067263aeac","_type":"block","asset":null,"children":[{"_key":"4bd84fc0cd04","_type":"span","marks":[],"text":"Only if the "},{"_key":"fe7f6f9b910f","_type":"span","marks":["strong"],"text":"government"},{"_key":"26d3280129f7","_type":"span","marks":[],"text":" "},{"_key":"44aee7f61cbc","_type":"span","marks":["strong"],"text":"purchases"},{"_key":"6d006ae8b5b2","_type":"span","marks":[],"text":" the "},{"_key":"bec637c1be1b","_type":"span","marks":["strong"],"text":"surplus"},{"_key":"4ed1869ecccd","_type":"span","marks":[],"text":", it can manage to keep the "},{"_key":"9b341b38c804","_type":"span","marks":["strong"],"text":"market price"},{"_key":"096f066fb407","_type":"span","marks":[],"text":" at the "},{"_key":"a39c444da4f7","_type":"span","marks":["strong"],"text":"price floor"},{"_key":"7acb50eb4d0f","_type":"span","marks":[],"text":" ("},{"_key":"9ef5a508a38c","_type":"span","marks":["strong"],"text":"$P_{floor}$"},{"_key":"50def71c5c21","_type":"span","marks":[],"text":"). "}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"ccd4530817fa","_type":"block","asset":null,"children":[{"_key":"91a64322ddbe","_type":"span","marks":[],"text":"If the government did not purchase the surplus:"}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"08beb62e66b7","_type":"block","asset":null,"children":[{"_key":"c25dda28430c","_type":"span","marks":[],"text":"The "},{"_key":"be0d52eb6bf5","_type":"span","marks":["strong"],"text":"price"},{"_key":"273420d947d9","_type":"span","marks":[],"text":" would "},{"_key":"dfd05415e3d7","_type":"span","marks":["strong"],"text":"fall"},{"_key":"a10633ff85e4","_type":"span","marks":[],"text":" "},{"_key":"d361e6549b31","_type":"span","marks":["strong"],"text":"back"},{"_key":"9db598db63d4","_type":"span","marks":[],"text":" down to "},{"_key":"e69a6e74bfc9","_type":"span","marks":["strong"],"text":"$P_e$."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"52deee09ce17","_type":"block","asset":null,"children":[{"_key":"6ea262058377","_type":"span","marks":[],"text":"This is because, since the producers would have "},{"_key":"d77319cfcb68","_type":"span","marks":["strong"],"text":"excess"},{"_key":"f6ff4ccf6dda","_type":"span","marks":[],"text":" "},{"_key":"824902085916","_type":"span","marks":["strong"],"text":"supply"},{"_key":"392cce1724ef","_type":"span","marks":[],"text":" with "},{"_key":"9da35b6e5185","_type":"span","marks":["strong"],"text":"no"},{"_key":"29cb80958ba9","_type":"span","marks":[],"text":" "},{"_key":"406d2841caa4","_type":"span","marks":["strong"],"text":"demand"},{"_key":"5e96c88e136a","_type":"span","marks":[],"text":", they would "},{"_key":"d614dcc03a39","_type":"span","marks":["strong"],"text":"decrease"},{"_key":"ae0bb0e15bd1","_type":"span","marks":[],"text":" the "},{"_key":"7af2bf9aee86","_type":"span","marks":["strong"],"text":"prices"},{"_key":"22c713e19e6d","_type":"span","marks":[],"text":"."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"852e2fa4887e","_type":"block","asset":null,"children":[{"_key":"1feab3974134","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"normal"}] #### The welfare impacts of price floors [32afb08fcb73] [{"_key":"302c4e2d9f1a","_type":"block","asset":null,"children":[{"_key":"56f38245dbee","_type":"span","marks":[],"text":"While the understanding of the "},{"_key":"c7541a96c520","_type":"span","marks":["strong"],"text":"welfare loss"},{"_key":"5ee7d972c245","_type":"span","marks":[],"text":" that arises from "},{"_key":"509a763201b3","_type":"span","marks":["strong"],"text":"price floors"},{"_key":"8b1dd5b36ba4","_type":"span","marks":[],"text":" is "},{"_key":"35ea48a06878","_type":"span","marks":["strong"],"text":"SL&HL content"},{"_key":"baac332b461a","_type":"span","marks":[],"text":", the specific calculations is an "},{"_key":"f0251c5fb97c","_type":"span","marks":["strong"],"text":"HL only content"},{"_key":"a2f4b872a4f9","_type":"span","marks":[],"text":". "}],"markDefs":[],"style":"normal"}] In order to calculate the change in **welfare** **impacts** due to price ceiling, we need to look at _Figure 6_: ![](https://cdn.sanity.io/images/w7j7fz60/production/3a83059791f26382087d18ba29b2fab582c74d50-2292x1876.png) As we can see in the diagram: 1. **Before the price floor:** 1. **Consumer surplus= $a+b+c$.** 2. **Producer surplus= $d+e$.** 2. **After the price floor:** 1. **Consumer surplus **loses areas **$b+c$**. 1. Therefore, new** Consumer surplus = $a$** 2. **Producer surplus** gains areas **$b+c+f$**. 1. Therefore, new **Producer surplus = $d+e+b+c+f$.** 3. The **government pays for the excess supply**, which equals to the **price per unit times the surplus amount**, hence $P_f \times (Q_s-Q_d)$. 4. To buy the surplus, the government uses the money collected from** tax revenue**, which has an **opportunity cost** for other uses in society. 5. Therefore all the money spent by the government ($P_f \times (Q_s-Q_d)$) translates into **welfare loss**. 6. However, while **government spending **loses area **$f$** to society, this area **$f$** is gained by **producers**' **surplus**. 7. Therefore, the **welfare loss ($WL$)** after the **price floor** is represented by the areas **$c+e+g$**. 1. **Welfare loss = $c+e+g$**. 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Just remember that:"}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"def4172cd995","_type":"block","asset":null,"children":[{"_key":"27c85fd749c30","_type":"span","marks":["strong"],"text":"Consumer surplus"},{"_key":"27c85fd749c31","_type":"span","marks":[],"text":" is the "},{"_key":"27c85fd749c32","_type":"span","marks":["strong"],"text":"difference"},{"_key":"27c85fd749c33","_type":"span","marks":[],"text":" between the highest "},{"_key":"27c85fd749c34","_type":"span","marks":["strong"],"text":"price"},{"_key":"27c85fd749c35","_type":"span","marks":[],"text":" that "},{"_key":"27c85fd749c36","_type":"span","marks":["strong"],"text":"consumers"},{"_key":"27c85fd749c37","_type":"span","marks":[],"text":" are "},{"_key":"27c85fd749c38","_type":"span","marks":["strong"],"text":"willing to pay"},{"_key":"27c85fd749c39","_type":"span","marks":[],"text":" and the "},{"_key":"27c85fd749c310","_type":"span","marks":["strong"],"text":"price"},{"_key":"27c85fd749c311","_type":"span","marks":[],"text":" that they actually "},{"_key":"27c85fd749c312","_type":"span","marks":["strong"],"text":"paid"},{"_key":"27c85fd749c313","_type":"span","marks":[],"text":"."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"7916e483edb6","_type":"block","asset":null,"children":[{"_key":"06275c5035180","_type":"span","marks":["strong"],"text":"Producer surplus"},{"_key":"06275c5035181","_type":"span","marks":[],"text":" is the "},{"_key":"06275c5035182","_type":"span","marks":["strong"],"text":"difference"},{"_key":"06275c5035183","_type":"span","marks":[],"text":" between the "},{"_key":"06275c5035184","_type":"span","marks":["strong"],"text":"price received"},{"_key":"06275c5035185","_type":"span","marks":[],"text":" by the "},{"_key":"06275c5035186","_type":"span","marks":["strong"],"text":"sellers"},{"_key":"06275c5035187","_type":"span","marks":[],"text":" and the lowest "},{"_key":"06275c5035188","_type":"span","marks":["strong"],"text":"price"},{"_key":"06275c5035189","_type":"span","marks":[],"text":" that they would be "},{"_key":"06275c50351810","_type":"span","marks":["strong"],"text":"willing to accept"},{"_key":"06275c50351811","_type":"span","marks":[],"text":"."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"ff0df075992f","_type":"block","asset":null,"children":[{"_key":"fbfec6d56fe10","_type":"span","marks":["strong"],"text":"Deadweight Loss"},{"_key":"fbfec6d56fe11","_type":"span","marks":[],"text":" is the "},{"_key":"fbfec6d56fe12","_type":"span","marks":["strong"],"text":"social surplus lost"},{"_key":"fbfec6d56fe13","_type":"span","marks":[],"text":" because of "},{"_key":"fbfec6d56fe14","_type":"span","marks":["strong"],"text":"misallocation of resources"},{"_key":"fbfec6d56fe15","_type":"span","marks":[],"text":"."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"}] [{"_key":"187dc2612e46","_type":"block","asset":null,"children":[{"_key":"f38d2b24726c","_type":"span","marks":[],"text":"It is a common mistake to confuse who are producers and consumers in the "},{"_key":"733398d53a75","_type":"span","marks":["strong"],"text":"labour market"},{"_key":"1536deecc94c","_type":"span","marks":[],"text":". "}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"bc9fa2d9089b","_type":"block","asset":null,"children":[{"_key":"b7bf809ebdd7","_type":"span","marks":[],"text":"It can be a bit counter-intuitive, but:"}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"9d231ecae604","_type":"block","asset":null,"children":[{"_key":"87427b9093af","_type":"span","marks":["strong"],"text":"Workers are the producers "},{"_key":"eaa07ff35b7b","_type":"span","marks":[],"text":"(they supply labour and so are represented by the "},{"_key":"54e09df12755","_type":"span","marks":["strong"],"text":"supply curve"},{"_key":"e57eac1ce4c1","_type":"span","marks":[],"text":")."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"e912cda1037e","_type":"block","asset":null,"children":[{"_key":"8a26049ec51f","_type":"span","marks":["strong"],"text":"Employers are the consumers"},{"_key":"3cce0cebf2d1","_type":"span","marks":[],"text":" (they demand labour and so are represented by the "},{"_key":"d9f364683cf0","_type":"span","marks":["strong"],"text":"demand curve"},{"_key":"ce5c083f0044","_type":"span","marks":[],"text":")."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"7f373f7285b2","_type":"block","asset":null,"children":[{"_key":"66d70f04b0c5","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"normal"}] [{"_key":"9cd190872c7c","_type":"block","asset":null,"children":[{"_key":"60bd4a3fa591","_type":"span","marks":[],"text":"Price floor: minimum wage in Seattle"}],"markDefs":[],"style":"h3"},{"_key":"31d9b46db72d","_type":"block","asset":null,"children":[{"_key":"1968deede6750","_type":"span","marks":["strong"],"text":"When"},{"_key":"1968deede6751","_type":"span","marks":[],"text":": 2015-2017"}],"markDefs":[],"style":"normal"},{"_key":"92064fe1c1ef","_type":"block","asset":null,"children":[{"_key":"ab372bff72790","_type":"span","marks":["strong"],"text":"Where"},{"_key":"ab372bff72791","_type":"span","marks":[],"text":": Seattle, USA"}],"markDefs":[],"style":"normal"},{"_key":"039eebe2ec6b","_type":"block","asset":null,"children":[{"_key":"ecdbf95ca9be0","_type":"span","marks":["strong"],"text":"What"},{"_key":"ecdbf95ca9be1","_type":"span","marks":[],"text":": Seattle introduced a progressive minimum wage increase, reaching $15/hour by 2017 for large employers."}],"markDefs":[],"style":"normal"},{"_key":"d34cea70c73c","_type":"block","asset":null,"children":[{"_key":"c7fc0423befb0","_type":"span","marks":["strong"],"text":"Why"},{"_key":"c7fc0423befb1","_type":"span","marks":[],"text":": To improve living standards for low-wage workers in a high-cost city."}],"markDefs":[],"style":"normal"},{"_key":"632374b04be2","_type":"block","asset":null,"children":[{"_key":"54d93a790a400","_type":"span","marks":["strong"],"text":"So?"},{"_key":"0ea53461fb6c","_type":"span","marks":[],"text":":"}],"markDefs":[],"style":"normal"},{"_key":"5327d9c95393","_type":"block","asset":null,"children":[{"_key":"543cd6e93b9d0","_type":"span","marks":[],"text":"Workers gained higher wages, with an average increase of USD 1.18/hour, resulting in modest income gains of USD 52/month after accounting for reduced work hours (-9.4 hours/month)."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"b69ad9bcb08d","_type":"block","asset":null,"children":[{"_key":"f74f5cae98060","_type":"span","marks":[],"text":"Employers faced increased payroll costs, leading to staff reductions, fewer hours, and investments in automation."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"3d9e4d49e5e7","_type":"block","asset":null,"children":[{"_key":"6522fb13e8d30","_type":"span","marks":[],"text":"Restaurant closures rose by 14%, particularly among small, independent businesses."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"8724caf27f51","_type":"block","asset":null,"children":[{"_key":"f741d35870040","_type":"span","marks":["strong"],"text":"So"},{"_key":"f741d35870041","_type":"span","marks":[],"text":":"}],"markDefs":[],"style":"normal"},{"_key":"3e6de1d7122e","_type":"block","asset":null,"children":[{"_key":"addee8322c6b0","_type":"span","marks":[],"text":"There are trade-offs of price floors and the negative impact it may have on consumers (in this case the employers) and the economy as a whole."}],"markDefs":[],"style":"normal"},{"_key":"3c11b8dc3516","_type":"block","asset":null,"children":[{"_key":"f8d1468f16830","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"normal"}] ## Indirect Taxes [block_40] **Taxes** levied on **spending on goods and services.** They are called **indirect** because while consumers contribute to part or all of the tax, it is the **suppliers (firms)** who **collect** and **transfer** these **taxes** to the **government authorities **(consumers pay the taxes **indirectly**). 1. The imposition of an indirect tax increases the price of a good or service paid by **consumers**. 2. Hence, **governments** impose **indirect taxes** to influence the consumption of a good or service. 3. Additionally, imposing **indirect taxes** **benefits** the **government** by generating revenue from the tax collection. 4. However, while the tax is **levied** on **consumers**, the **producers** are the ones who **collect** and **pay** it. 5. As a result, indirect taxes have the primarily effect of **increasing the costs of production**, and hence shifting the **supply** **curve** to the left. [{"_key":"12245e1745cd","_type":"block","asset":null,"children":[{"_key":"853b5d5ae599","_type":"span","marks":[],"text":"There are two types of "},{"_key":"8378ea7320ad","_type":"span","marks":["strong"],"text":"indirect taxes"},{"_key":"3bf9001cc705","_type":"span","marks":[],"text":":"}],"markDefs":[],"style":"normal"},{"_key":"5abdeb37b9a1","_type":"block","asset":null,"children":[{"_key":"58d31c3e8525","_type":"span","markDefs":[],"marks":["strong"],"text":"Specific taxes"},{"_key":"283204485068","_type":"span","markDefs":[],"marks":[],"text":": a "},{"_key":"1cc24f04919a","_type":"span","markDefs":[],"marks":["strong"],"text":"fixed amount"},{"_key":"94a897c4e6cf","_type":"span","markDefs":[],"marks":[],"text":" per unit sold (\\$1 per cigarette pack, \\$3 per litre of fuel...)."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"b3597186730e","_type":"block","asset":null,"children":[{"_key":"28cf44bd4024","_type":"span","markDefs":[],"marks":["strong"],"text":"Ad valorem taxes"},{"_key":"37c6a845db71","_type":"span","markDefs":[],"marks":[],"text":": a "},{"_key":"6d01c90e7eec","_type":"span","markDefs":[],"marks":["strong"],"text":"percentage"},{"_key":"54b833f841eb","_type":"span","markDefs":[],"marks":[],"text":" of the product's price (20% VAT, 5% on the final price of alcoholic beverages...)."}],"level":2,"listItem":"bullet","markDefs":[],"style":"normal"}] ![](https://cdn.sanity.io/images/w7j7fz60/production/99253d59cd7f2529f607f9c917b0cace0f755f86-2202x1942.png) _Figure 6 _represents an imposition of a **specific tax** on a market: 1. As can be seen, at the initial **equilibrium price** (**$P_e$**) a **quantity** of **$Q_e$ **is demanded. 2. When the **specific tax** is imposed: 1. The **supply** curve **shifts upwards** from **$S$** to **$S_{+tax}$.** 2. With this **new supply curve ($S_{+tax}$)**, a **new equilibrium** is stablished at the intersection of **$S_{+tax}$** and **$D$ ($P_c,Q_{ tax }$)**. 3. Therefore, the **quantity demanded decreases** from **$Q_e \text{ to } Q_{tax}$**. 4. Additionally, the **price ($P_c$)** is the price **consumers** **pay** for the good or service. 5. However, in this price ($P_c$), there is the tax included. Therefore, the price producers receive, after paying the tax to the government, is $P_p = P_c - tax$. 6. As a result of the tax, a** new equilibrium** is reached where **less** **cigarettes** **are** **being** **consumed**, and at a **higher price**. ![](https://cdn.sanity.io/images/w7j7fz60/production/25e50ce2d5795017c7767f3a3d471f1eb258fb58-2202x1942.png) _Figure 7 _represents an imposition of an **ad-valorem tax** on a market: 1. As can be seen, at the initial **equilibrium price** (**$P_e$**) a quantity of **$Q_e$** is demanded. When the **ad-valorem tax** is imposed: 1. The **supply** curve **shifts upwards** from **$S$** to **$S_{+tax}$.** 2. The **supply curve **becomes more **upward-slopping**. This is because the **ad-valorem tax** is a fixed percentage of the price, and therefore the **higher the price**, the **higher the amount of tax paid**. 3. Ultimately, as a result of the ad-valorem tax, there is also a** new equilibrium** reached where **less** **cigarettes** **are** **being** **consumed**, and at a **higher price**. [{"_key":"7d5476566270","_type":"block","asset":null,"children":[{"_key":"75f5cdbb34840","_type":"span","marks":[],"text":"Students often forget that the "},{"_key":"75f5cdbb34841","_type":"span","marks":["strong"],"text":"shift in the supply curve"},{"_key":"75f5cdbb34842","_type":"span","marks":[],"text":" has to be "},{"_key":"75f5cdbb34843","_type":"span","marks":["strong"],"text":"equal"},{"_key":"75f5cdbb34844","_type":"span","marks":[],"text":" to the "},{"_key":"75f5cdbb34845","_type":"span","marks":["strong"],"text":"amount of tax"},{"_key":"75f5cdbb34846","_type":"span","marks":[],"text":". "}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"2e904167d4c5","_type":"block","asset":null,"children":[{"_key":"2892c5643b59","_type":"span","marks":[],"text":"Therefore pay "},{"_key":"75f5cdbb34847","_type":"span","marks":["strong"],"text":"attention"},{"_key":"75f5cdbb34848","_type":"span","marks":[],"text":" to this and be "},{"_key":"75f5cdbb34849","_type":"span","marks":["strong"],"text":"careful"},{"_key":"75f5cdbb348410","_type":"span","marks":[],"text":" in your "},{"_key":"75f5cdbb348411","_type":"span","marks":["strong"],"text":"drawings"},{"_key":"75f5cdbb348412","_type":"span","marks":[],"text":". Drawing the "},{"_key":"75f5cdbb348413","_type":"span","marks":["strong"],"text":"graph"},{"_key":"75f5cdbb348414","_type":"span","marks":[],"text":" wrong will "},{"_key":"75f5cdbb348415","_type":"span","marks":["strong"],"text":"lose you marks"},{"_key":"75f5cdbb348416","_type":"span","marks":[],"text":"."}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"}] ### Impacts of indirect tax on stakeholders [b13ab2fa5552] ![](https://cdn.sanity.io/images/w7j7fz60/production/67a77699522ecfad41da1ea3cf7a90d4806a2e98-2202x1942.png) _Figure 8_ above showcases the different effect that an **indirect tax** will have on different stakeholders: 1. **Consumers**: consumers pay **higher price** (**$P_c$**), then they would have paid in the original equilibrium (**$P_e$**), since (**$P_c>P_e$**) 2. **Producers**: producer receive **lower price** (**$P_p$**), then they would have received in the original equilibrium (**$P_e$**), since (**$P_p [{"_key":"5a4a55dbcf20","_type":"block","asset":null,"children":[{"_key":"7f68b3b5d6e30","_type":"span","marks":[],"text":"Don’t confuse "},{"_key":"7f68b3b5d6e31","_type":"span","marks":["strong"],"text":"indirect taxes"},{"_key":"7f68b3b5d6e32","_type":"span","marks":[],"text":" with "},{"_key":"7f68b3b5d6e33","_type":"span","marks":["strong"],"text":"direct taxes"},{"_key":"7f68b3b5d6e34","_type":"span","marks":[],"text":" (e.g., "},{"_key":"7f68b3b5d6e35","_type":"span","marks":["strong"],"text":"income tax"},{"_key":"7f68b3b5d6e36","_type":"span","marks":[],"text":"). "}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"6ff0b73aeb58","_type":"block","asset":null,"children":[{"_key":"7f68b3b5d6e37","_type":"span","marks":["strong"],"text":"Indirect taxes"},{"_key":"7f68b3b5d6e38","_type":"span","marks":[],"text":" are "},{"_key":"7f68b3b5d6e39","_type":"span","marks":["strong"],"text":"levied"},{"_key":"7f68b3b5d6e310","_type":"span","marks":[],"text":" on "},{"_key":"7f68b3b5d6e311","_type":"span","marks":["strong"],"text":"goods and services"},{"_key":"7f68b3b5d6e312","_type":"span","marks":[],"text":", not on "},{"_key":"7f68b3b5d6e313","_type":"span","marks":["strong"],"text":"income"},{"_key":"7f68b3b5d6e314","_type":"span","marks":[],"text":"."}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"}] [{"_key":"944b7d2048f7","_type":"block","asset":null,"children":[{"_key":"98baaf94e487","_type":"span","marks":[],"text":"Indirect tax: sugar tax in the United Kingdom"}],"markDefs":[],"style":"h3"},{"_key":"25412f1a1bd2","_type":"block","asset":null,"children":[{"_key":"36f8bd748a350","_type":"span","marks":["strong"],"text":"When"},{"_key":"36f8bd748a351","_type":"span","marks":[],"text":": April 2018"}],"markDefs":[],"style":"normal"},{"_key":"07080bd3c81a","_type":"block","asset":null,"children":[{"_key":"cbd585163f410","_type":"span","marks":["strong"],"text":"Where"},{"_key":"cbd585163f411","_type":"span","marks":[],"text":": United Kingdom"}],"markDefs":[],"style":"normal"},{"_key":"c26e417477aa","_type":"block","asset":null,"children":[{"_key":"5f8bc9e65dc00","_type":"span","marks":["strong"],"text":"What"},{"_key":"5f8bc9e65dc01","_type":"span","marks":[],"text":": The UK introduced the Soft Drinks Industry Levy, an indirect tax on high-sugar beverages, to reduce sugar consumption and tackle obesity."}],"markDefs":[],"style":"normal"},{"_key":"20fbd2a950d5","_type":"block","asset":null,"children":[{"_key":"09453fb97e250","_type":"span","marks":["strong"],"text":"Why"},{"_key":"09453fb97e251","_type":"span","marks":[],"text":": To encourage healthier consumption habits, reduce obesity rates, and incentivize producers to lower sugar content in beverages."}],"markDefs":[],"style":"normal"},{"_key":"707de2e912ad","_type":"block","asset":null,"children":[{"_key":"01080ea2295c0","_type":"span","marks":["strong"],"text":"How"},{"_key":"01080ea2295c1","_type":"span","marks":[],"text":":"}],"markDefs":[],"style":"normal"},{"_key":"b7e75f5c7931","_type":"block","asset":null,"children":[{"_key":"1ef2e8b5fd200","_type":"span","marks":[],"text":"Drinks with 5-8g of sugar per 100ml were taxed at £0.18/liter, while those with over 8g/100ml faced a £0.24/liter tax."}],"markDefs":[],"style":"normal"},{"_key":"c2f80d59c4ea","_type":"block","asset":null,"children":[{"_key":"41c1fa512899","_type":"span","marks":["strong"],"text":"So?:"}],"markDefs":[],"style":"normal"},{"_key":"03d9bf296f6d","_type":"block","asset":null,"children":[{"_key":"d14a62e35a370","_type":"span","marks":["strong"],"text":"Consumer impact"},{"_key":"d14a62e35a371","_type":"span","marks":[],"text":": prices rose significantly, e.g., a 2L Coca-Cola bottle cost £0.48 more, leading to a 10% reduction in high-sugar drink sales by 2019. Lower-income households showed the greatest drop in consumption."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"a0f7d096b145","_type":"block","asset":null,"children":[{"_key":"da8bfbda26f90","_type":"span","marks":["strong"],"text":"Producer response"},{"_key":"da8bfbda26f91","_type":"span","marks":[],"text":": over 50% of previously taxable beverages were reformulated to contain less than 5g/100ml of sugar by 2020. Companies that didn't reformulate faced falling sales and profits."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"6f3c87c6ba2e","_type":"block","asset":null,"children":[{"_key":"f660108e15b7","_type":"span","marks":["strong"],"text":"Consumption reduction"},{"_key":"7d6d2b21fa26","_type":"span","marks":[],"text":": the sugar tax successfully reduced sugar consumption from soft drinks by 30% (2015-2019) through reformulation and behavior change. "}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"48d01285c6c2","_type":"block","asset":null,"children":[{"_key":"c6dc512a734d","_type":"span","marks":["strong"],"text":"Government revenue"},{"_key":"91862537f12c","_type":"span","marks":[],"text":": the government raised £240M in its first year, funding health programs. "}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"0f1f45d3047e","_type":"block","asset":null,"children":[{"_key":"057fedc2912f","_type":"span","marks":["strong"],"text":"Substitution"},{"_key":"c2f467c518e2","_type":"span","marks":[],"text":": substitution effects (e.g., replacing sugary drinks with unhealthy snacks), highlight the need for broader health strategies."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"}] ## Subsidies [b01dd5962c5f] **Monetary help **(direct or indirect payment) offered by the **government** to firms (sometimes households) to aid in **lowering** costs of production. 1. The provision of a **subsidy** **decreases** the **production** **costs** of **producers**, and the **price** **paid** **by** **consumers**. 2. Hence, **governments** offer **subsidies** to **encourage** **production** or **consumption** of a specific good or service. 3. Since **subsidies** are directly **provided** to **producers** by the **government**, and they have the primary effect of **decreasing** the **costs** **of** **production**, the result is a **supply** **curve** **shift** to the **right**. **Governments** provide **subsidies** for multiple reasons: 1. **To make certain goods more accessible for lower income households**: by providing a subsidy, the government increases the price received by the producers, hence allowing them to charge a lower price for their good/service. 2. **Encourage the production of a certain good/service**: if there are any goods that a government may find that is desirable for the economy, it may provide subsidies to increase its production. 3. **Encourage exports**: governments may provide subsidies to domestic firms to increase the **export** of a **certain** **good**. 4. **Support the growth of certain industries in economy**: the government may want to develop a specific industry in the economy, hence subsidies are one way to encourage that growth. The effect a **subsidy** has in the market of a good or service is depicted below by _Figure 10_: ![](https://cdn.sanity.io/images/w7j7fz60/production/9331aedbbeff01138d429b8f17074b61b15901b1-2292x1876.png) 1. In _Figure 10_, it can be seen that at the original **market** **equilibrium, **there is a **price $P_e$** and **quantity produced of $Q_e$**. 2. However after the introduction of the **subsidy**: 1. The **supply** of the good **increases** from **$S \text{ to } S_{sub}$**. 2. At this level a quantity of **$Q_{sub}$** is being **produced **and** demanded**. 3. Consumers pay **price** **$P_c$**. 4. Producers receive **price** **$P_p$**. 3. The the amount of subsidy paid by the government equals to the area $(P_p-P_c) \times Q_{sub}$. [{"_key":"61164481e4b3","_type":"block","asset":null,"children":[{"_key":"3ea55f88bd84","_type":"span","marks":[],"text":"There is an "},{"_key":"ac3b4c102b6b","_type":"span","marks":["strong"],"text":"overallocation of resources"},{"_key":"23870d6e2906","_type":"span","marks":[],"text":", as the free market quantity demanded $"},{"_key":"f4ff191f58c7","_type":"span","marks":["strong"],"text":"Q_e"},{"_key":"163fa5aa9352","_type":"span","marks":[],"text":"$ is smaller than the $"},{"_key":"4b03a0f9b44e","_type":"span","marks":["strong"],"text":"Q_sub"},{"_key":"8293c2fde723","_type":"span","marks":[],"text":"$."}],"markDefs":[],"style":"normal"}] #### The welfare impacts of subsidies [6a085f7e0597] ![](https://cdn.sanity.io/images/w7j7fz60/production/7b154e3c7a5c90428444453c01bf94769c756b38-2292x1876.png) _Figure 10_ shows the welfare impact of a subsidy. 1. Both **consumers** and **producers** gain in **surplus**, as: 1. **Producers**: receive higher price than in equilibrium ($P_p$). 2. **Consumers**: pay a lower price than in equilibrium ($P_c$). 2. However, there is still a **welfare loss** (equal to area **$WL$**), because: 1. The government spending in area** $WL$** does not translate to any gains in **social surplus**. 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For instance, without subsidies, milk prices could exceed €1.00 per liter, but with CAP, they averaged around €0.90 per liter."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"b78df3f9dad5","_type":"block","asset":null,"children":[{"_key":"7710730c580d0","_type":"span","marks":["strong"],"text":"Production growth"},{"_key":"7710730c580d1","_type":"span","marks":[],"text":": dairy production increased from 127 million tons in 2000 to 156 million tons annually by the early 2020s, supported by subsidies."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"9e1665c19056","_type":"block","asset":null,"children":[{"_key":"cc72e9d7c472","_type":"span","marks":["strong"],"text":"Price stabilisation"},{"_key":"923ca114333f","_type":"span","marks":[],"text":":"},{"_key":"ce452509d38a","_type":"span","marks":["strong"],"text":" "},{"_key":"fe7438102190","_type":"span","marks":[],"text":"the CAP stabilized milk prices and increased dairy production, benefiting consumers and farmers."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"9f0259b0ca8c","_type":"block","asset":null,"children":[{"_key":"5bf2d73a26f2","_type":"span","marks":["strong"],"text":"Overproduction"},{"_key":"ea56b6b13366","_type":"span","marks":[],"text":": led to overproduction, with 350,000 tons of butter and 300,000 tons of powdered milk in surplus by 2019."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"b8460932a41a","_type":"block","asset":null,"children":[{"_key":"edc9bda8dcd80","_type":"span","marks":[],"text":"CAP subsidies, while effective in reducing consumer costs and supporting agriculture, introduced market inefficiencies and significant fiscal costs, consuming over €58 billion annually in the 2014-2020 budget period."}],"markDefs":[],"style":"normal"}] ## Direct provision of services [298e460bfa61] When the **government** **directly** **delivers** the goods/services to the public. Sometimes **governments** may decide to **directly provide** a certain good/service to the public themselves because: 1. The **private firms failed to meet the market needs** and caused **market failure** (_subtopic 2.8_). 2. Make sure that the provided **good/service is affordable** and everyone has easy access to it (healthcare, education, water...). 3. Keep the **quality high** to ensure **public welfare **(transportation, COVID masks...). 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In 2020, the NHS conducted over 300 million GP consultations and more than 10 million hospital admissions."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"440f0652c353","_type":"block","asset":null,"children":[{"_key":"9d2e3744dbed","_type":"span","marks":["strong"],"text":"So?:"}],"markDefs":[],"style":"normal"},{"_key":"41c9541d48cc","_type":"block","asset":null,"children":[{"_key":"20f07d5940f00","_type":"span","marks":["strong"],"text":"Cost accessibility"},{"_key":"20f07d5940f01","_type":"span","marks":[],"text":": eliminates individual healthcare costs at the time of use, ensuring affordability for all residents."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"6f794f178fd8","_type":"block","asset":null,"children":[{"_key":"14a7e7536d98","_type":"span","marks":["strong"],"text":"Equitable access"},{"_key":"18b1a3a37d17","_type":"span","marks":[],"text":": the NHS promotes equitable healthcare access and enhances public health by removing financial barriers to medical services. "}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"f5b2450011e5","_type":"block","asset":null,"children":[{"_key":"38f54e08c6b3","_type":"span","marks":["strong"],"text":"Inefficient and over-demanded"},{"_key":"c460c25a13be","_type":"span","marks":[],"text":": the NHS faces numerous challenges, like long wait times and financial strain from increasing demand."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"172d9dcb6dc4","_type":"block","asset":null,"children":[{"_key":"aca736538bf80","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"normal"}] ## Command and control regulation and legislation [7e6d5276c25f] Establishment of **requirements** and **standards** to **regulate** **behaviour**. 1. **Command and control regulation and legislation** includes the use of **laws**, and **government** **regulations** to affect the** market outcomes**. 2. The use of **laws** and **regulations** can help to: 1. **Solve the inefficiencies** caused due to the fail of voluntary compliances. 2. Can quickly **reduce risks to public welfare**. However, there are some disadvantages to command and control regulation: 1. The establishment of new **laws** and regulation can **take a while to be approved**. 2. **Government** has to **dedicate resources** to make sure that **economic entities follow these regulations**. 3. these resources may require extra **time and money**, which has to be compensated from **tax revenue** which has high **opportunity cost**. 4. The decision of the **market outcome** relies on a **few people**, who may have underlying political interests contrary to economic needs. 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For example, in 2019, power plants were required to reduce sulfur dioxide emissions by 80% using cleaner technologies."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"1c26669ed356","_type":"block","asset":null,"children":[{"_key":"ec723bdec6540","_type":"span","marks":["strong"],"text":"So?"},{"_key":"ec723bdec6541","_type":"span","marks":[],"text":":"}],"markDefs":[],"style":"normal"},{"_key":"540d1a16c72f","_type":"block","asset":null,"children":[{"_key":"339e4e7d7df60","_type":"span","marks":[],"text":"The Clean Air Act has decreased major air pollutants by over 70% since 1970, significantly improving public health by reducing asthma and respiratory illnesses and limiting environmental damage. Despite criticism over high compliance costs for businesses, it remains a cornerstone of U.S. environmental policy, effectively balancing economic growth with environmental sustainability."}],"markDefs":[],"style":"normal"}] ## Consumer nudges (HL Only) [a19c50180dab] A method used to influence the decision of a consumer in a **desirable** **way**, without offering any **financial** **incentives** or imposing any **legal regulations** over them. Purposes of consumer nudges may include: 1. **Pursuing consumers** to follow a certain behavior which will lead them them to **make more beneficial decisions** both for themselves and for the economy. 2. Improve social welfare without using any financial or heavy regulation. Consumer **nudges** are a **beneficial** way of** influencing a market outcome **because: 1. They allow to **influence** the **decisions** of consumers **while** **preserving** their **individual freedom **and not forcing any regulation over them. 2. **Low costs and high benefit** method of affecting market outcome saves preserve scarce **government budgets**. 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