6.4 The Effects of Government Intervention in Different Market Structures

a. Define government policy interventions in imperfect markets. b. Explain (using graphs where appropriate) how government policies can alter market outcomes in perfectly and imperfectly competitive markets. c. Calculate (using data from a graph or table as appropriate) changes in market outcomes resulting from government policies in perfectly competitive and imperfectly competitive markets.

• Per-unit taxes and subsidies affect the total price consumers pay, net price firms receive, equilibrium quantity, consumer and producer surpluses, deadweight loss, and government revenue or cost. The impact of change depends on the price elasticity of demand and supply.
• Lump-sum taxes and lump-sum subsidies do not change either marginal cost or marginal benefit; only fixed costs will be affected.
• Binding price ceilings and floors affect prices and quantities differently depending on the market structures (perfect competition, monopoly, monopolistic competition, and monopsony) and the price elasticities of supply and demand.
• Government intervention in imperfect markets can increase efficiency if the policy correctly addresses the incentives that led to the market failure.
• Government can use price regulation to address inefficiency due to monopoly.
• A natural monopoly will require a lump-sum subsidy to produce at the allocatively efficient quantity.
• Governments use antitrust policy in an attempt to make markets more competitive. Exclusion: A graph of inefficiency and policy due to collusion is beyond the scope of the course and the AP Exam.
• Enduring understanding POL-4: In imperfect markets, well-designed government policy can reduce waste.