← Unit 2 · Microeconomics
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Unit 2 · Microeconomics

Chapter 3 · Government & Market Failure

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Indirect tax
Shifts supply up; raises P, lowers Q; incidence on the more inelastic side.
Subsidy
Shifts supply down; lowers P, raises Q.
Price ceiling / floor
Below eq. ⇒ shortage; above eq. ⇒ surplus.
Externalities
MSC=MPC+MEC,    MSB=MPB+MEBMSC = MPC + MEC,\;\; MSB = MPB + MEB
Efficiency at MSB=MSCMSB=MSC; gap ⇒ welfare loss.
Public good
Non-rival + non-excludable ⇒ free-rider problem ⇒ govt provision.
Information failures
Adverse selection (hidden info); moral hazard (hidden action).
Market power
Monopoly: MR=MC, P>MC ⇒ higher price, lower output, deadweight loss.
Equity vs equality
Gini 0→1; progressive tax & transfers redistribute.