AP Microeconomics AMSCO Guided Notes
6.4: The Effects of Government Intervention in Different Market Structures
AP Microeconomics Guided Notes
AMSCO 6.4 - The Effects of Government Intervention in Different Market Structures
Essential Questions
- How can well-designed government policies reduce waste in imperfect markets?
I. Reasons for Government Intervention in Imperfect Markets
1. Why do governments intervene in imperfect markets when markets tend to reach equilibrium on their own?
A. Equity
1. What is equity and why do governments intervene in markets to promote it?
2. How does the Americans with Disabilities Act illustrate government intervention to achieve equity?
B. Breaking Up Monopolies
1. What is the Sherman Antitrust Act and what practices does it prohibit?
2. How did the government's action against Microsoft's browser bundling increase competition in the market?
II. Different Methods of Government Intervention
A. Per-Unit Taxes and Subsidies
1. What is a per-unit tax and why do governments impose them on goods like cigarettes and alcohol?
2. How do per-unit taxes and subsidies affect equilibrium quantity and consumer behavior?
3. What is deadweight loss and how does it result from per-unit taxes?
4. How does elasticity affect the impact of per-unit taxes and subsidies on quantity demanded?
B. Lump-Sum Taxes and Subsidies
1. How does a lump-sum tax differ from a per-unit tax in terms of its effect on marginal costs?
2. Why might farmers with different operation sizes object to a lump-sum tax?
C. Price Ceilings and Price Floors
1. What are price ceilings and price floors, and what is the difference between binding and non-binding controls?
1. Price Controls and Perfectly Competitive Markets
1. What are the effects of a binding price ceiling on quantity demanded, quantity supplied, and quality in a competitive market?
2. How does a price floor above equilibrium create a surplus, and what happens to quantity exchanged?
III. Government Regulation of Monopolies
1. Why are monopolies inefficient and how can government regulation address this inefficiency?
A. Government Regulation Can Increase or Decrease Efficiency
1. How can price regulation on a monopoly make a market more efficient while still allowing producers to profit?
2. What is the trade-off when government uses subsidies or tax breaks to encourage competition in monopoly markets?
B. Government Regulation of Natural Monopolies
1. What is a natural monopoly and why is it difficult for competitors to enter these markets?
2. How do governments use lump-sum subsidies to regulate natural monopolies while maintaining allocative efficiency?
Key Terms
imperfect markets
Sherman Antitrust Act
binding