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Government intervention - Coggle Diagram
Government intervention
Taxes
Indirect taxes
Specific tax (fixed sum)
Ad valorem tax (percentage)
Incidence of tax
When analysing the effects of a tax, economists look at the incidence of taxation.
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Indirect taxes are paid to tax authorities indirectly by the suppliers of goods and services, thus they lead to a leftward shift of the supply curve.
When PED<PES, buyers bear a greater burden of the tax.
When PED>PES, sellers bear greater burden of the tax
Direct Taxes
Direct taxes are taxes on income and wealth and are paid to the tax authorities directly. They are paid by consumers, and hence lead to leftward shift of demand curve.
Subsidies
Subsidies are cash transferred from government to producer or consumer, and can be used to resolve market failure and/or as a response to inequity.
Specific subsidy
Ad valorem subsidy (percentage)
Change in society's welfare = change in consumer surplus + change in producer surplus + change in govt expenditure
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Labour Market
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Labour markets are seldom perfect and thus there may be market imperfections (actions to intervene in setting of wages)
Workers can have market power by establishing trade unions. (considered market imperfection as it deviates from perfectly competitive market)
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