ABSTRACT
This chapter considers two common types of government intervention: price regulation, and taxes and subsidies. It suggests that the market is efficient in the absence of government intervention. The chapter examines how government intervention affects market price, the quantity traded and welfare in the market. When a government puts in place a price ceiling, it sets a maximum price at which a good or service may be traded. Supply and demand change over time, which may affects the equilibrium price and quantity. This means that a price ceiling or price floor that was non-binding may become binding, or vice versa. The chapter also considers per-unit taxes, where the tax for each unit is a fixed amount–that is, for every unit, a tax of t must be paid to the government. A subsidy is a payment made by the government to an individual or firm, and can be thought of as a negative tax.
