Lecture Ten: Government Intervention
November 1, 2011
Production Subsidies and Quotas
Intervention in markets for farm products takes two main forms
- Production quotas
Production Quota - an upper limit to the quantity of a good that may produced
during a specified period.
Subsidy - a payment made by the government to a producer in an attempt to
stimulate production more than the market allocates
Markets for Illegal Goods
Illegal goods include drugs, prostitutes ect
- There is now a new cost which must be considered by the buyers and the
Penalty for the Sellers
The seller must provide their illegal production for whatever cost.
-They must also take into take into consideration a new cost: the penalty cost,
or cost of breaking the law
- The higher the penalty for sellers, the lower the supply will be because not as
many people will be willing to provide large quantities when there is so much
- Generally the suppliers are penalized slightly more than the buyers
- This extra cost causes the supply curve to shift to the left.
Penalty for the Buyers
The buyer must purchase the illegal good for market price, plus the penalty cost
of being caught with the illegal good (fines, jail time ect).
- The higher the penalty for buyers, the lower the demand will be for the product
because not as many people are willing to risk the penalty
- This extra cost causes the demand curve to shift to the left
Legalizing and Taxing Drugs Any illegal good can be legalized and taxes.
- The government can gain revenue from taxing this product
When the tax is hi