The document discusses various types of government intervention in markets, including taxes, subsidies, price controls, and regulation. It also examines how buffer stock schemes can help stabilize prices by buying excess supply when prices fall and releasing stock when prices rise. The effects of taxes and subsidies on producer and consumer surplus are analyzed using supply and demand diagrams. Subsidies are more likely to lower prices when demand is price elastic.

1. AS Micro
Government
Intervention in
Markets

2. • Indirect taxes on producers (affecting
supply)
• Indirect taxes on consumers (affecting
Taxes demand)
• Subsidies to consumers
• Subsidies to producers
• Guaranteed minimum prices to
Subsidies producers

3. • Minimum wages
• Price capping / ceilings (i.e. maximum
Price prices)
controls • Buffer stock agency schemes
• Prohibition of sale
• Minimum legal ages for consumption
• State ownership of businesses
Regulation (nationalisation)

4. Buffer Stocks – Do They Work?

5. How might a buffer stock help to
stabilise prices in the cocoa market?
Price of
Cocoa Planned
Supply
Upper Upper
Target Target Price
Lower Lower
Target Target Price
Market
Demand
Quantity

6. A rise in market supply
Price of
Cocoa Actual
Planned
Supply
Supply
Upper Upper
Target Target Price
Lower Lower
Target Target Price
Market
Demand
S1 Quantity

7. A rise in market supply
Price of
Cocoa Actual
Planned
Supply
Supply
Upper Upper
Target Target Price
Lower Lower
Target Target Price
Market
Demand
S1 Quantity

8. A rise in market supply
Price of
Cocoa Actual
Planned
Supply
Supply
Upper Upper
Target Target Price
Lower Lower
Target Target Price
Excess
supply at Market
this price Demand
Q1 S1 Quantity

9. A rise in market supply
Demand with
Price of purchases
Cocoa Actual
Planned
Supply
Supply
Upper Upper
Target Target Price
Lower Lower
Target Target Price
Market
Demand
Q1 S1 Quantity

10. A rise in market supply
Demand with
Price of purchases
Cocoa Actual
Planned
Supply
Supply
Upper Upper
Target Target Price
Lower Lower
Target Target Price
Cost of
buying up Market
stocks Demand
Q1 S1 Quantity

11. The case for price stabilisation
Lower risk of food
poverty
More stable incomes and
profits for farmers
Macroeconomic stability
Buffer stock ought to be
self-financing

12. Limitations of buffer stock schemes
Buffer may not be large
enough to change price
High intervention price
leads to rising surpluses
Costs of storage and
falling quality of product
Might be better long run
measures for farmers

13. Welfare Effects of a Tax and a Subsidy
Supply post tax
Costs and
Benefits
Supply pre tax
A
Demand
B Output

14. Welfare Effects of a Tax and a Subsidy
Supply post tax
Costs and
Benefits
Consumer Supply pre tax
B
pays B
A
Supplier
receives C C
Demand
B Output

15. Welfare Effects of a Tax and a Subsidy
Supply post tax
Costs and
Benefits
Consumer Supply pre tax
B
pays B
A
Supplier Tax revenue
receives C C
Demand
B Output

16. Welfare Effects of a Tax and a Subsidy
Supply post tax
Costs and
Benefits
Consumer Supply pre tax
B
pays B
A
Supplier Tax revenue
receives C C
Demand
B Output

17. Welfare Effects of a Tax and a Subsidy
Supply post tax
Costs and Consumer
Benefits burden
Consumer Supply pre tax
B
pays B
A
Supplier Tax revenue
receives C C
Demand
B Output

18. Welfare Effects of a Tax and a Subsidy
Supply post tax
Costs and Consumer
Benefits burden
Consumer Supply pre tax
B
pays B
A
Supplier Tax revenue
receives C C
Demand
B Output

19. Welfare Effects of a Tax and a Subsidy
Supply post tax
Costs and Consumer
Benefits burden
Consumer Supply pre tax
B
pays B
A
Supplier Tax revenue
receives C C
Demand
B Output
Producer burden

20. Quick Test!
An indirect tax on the
production of a good will If elasticity of demand for
have no effect on price if a product is (-) 0.4 then
the price elasticity of the majority of the
demand is? _________ burden of a tax on the
producer will be paid by
the _________________
In the event of a new tax
on a product, the price
will rise by the full
amount of the tax when
the price elasticity of
demand is ___________

21. Quick Test!
An indirect tax on the
production of a good will
have no effect on price if
the price elasticity of
demand is? _________

22. Quick Test!
An indirect tax on the
production of a good will
have no effect on price if
the price elasticity of
demand is? Infinity

23. Quick Test!
An indirect tax on the
production of a good will If elasticity of demand for
have no effect on price if a product is (-) 0.4 then
the price elasticity of the majority of the
demand is? Infinity burden of a tax on the
producer will be paid by
the

24. Quick Test!
An indirect tax on the
production of a good will If elasticity of demand for
have no effect on price if a product is (-) 0.4 then
the price elasticity of the majority of the
demand is? Infinity burden of a tax on the
producer will be paid by
the Consumer

25. Quick Test!
An indirect tax on the
production of a good will If elasticity of demand for
have no effect on price if a product is (-) 0.4 then
the price elasticity of the majority of the
demand is? Infinity burden of a tax on the
producer will be paid by
the Consumer
In the event of a new tax
on a product, the price
will rise by the full
amount of the tax when
the price elasticity of
demand is ___________

26. Quick Test!
An indirect tax on the
production of a good will If elasticity of demand for
have no effect on price if a product is (-) 0.4 then
the price elasticity of the majority of the
demand is? Infinity burden of a tax on the
producer will be paid by
the Consumer
In the event of a new tax
on a product, the price
will rise by the full
amount of the tax when
the price elasticity of
demand is ZERO

27. Welfare effects of a subsidy
Costs and
Benefits Supply pre subsidy
A
Supply post subsidy
Demand
B Output

28. Welfare effects of a subsidy
Costs and
Benefits Supply pre subsidy
A
Supply post subsidy
C
Demand
B D Output

29. Welfare effects of a subsidy
Costs and
Benefits Supply pre subsidy
Supplier
E
receives C
A
Supply post subsidy
Consumer
C
pays B
Demand
B D Output

30. Welfare effects of a subsidy
Costs and
Benefits Supply pre subsidy
Supplier
E
receives C
A
Supply post subsidy
Consumer
C
pays B
Subsidy
payment
Demand
B D Output

31. A subsidy when demand is price elastic
Price
Supply pre subsidy
A
Supply post subsidy
Demand
B Output

32. A subsidy when demand is price elastic
Price
Supply pre subsidy
A
Supply post subsidy
D
Demand
B C Output

33. A subsidy when demand is price elastic
Price
Supply pre subsidy
E
A
Supply post subsidy
D
Demand
B C Output

34. A subsidy when demand is price elastic
Price
Supply pre subsidy
E
A
Supply post subsidy
D
Demand
B C Output

35. A subsidy when demand is price elastic
Price
Supply pre subsidy
E
A
Supply post subsidy
D
Demand
Elastic demand – so a
subsidy causes a large rise
in quantity demanded
B C Output