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# Government Interventions In a free market, resources are allocated using the price mechanism. However, governments may intervene to correct market failures, redistribute income (using progressive taxation and benefits like pensions), and promote equity and fairness (unemployment benefits, disabi...

# Government Interventions In a free market, resources are allocated using the price mechanism. However, governments may intervene to correct market failures, redistribute income (using progressive taxation and benefits like pensions), and promote equity and fairness (unemployment benefits, disability benefits). **Methods of Intervention:** * **Taxes** * **Regulation** * **Minimum Prices** * **Subsidies** * **Direct Government Provision** * **Maximum Prices** **Maximum Prices:** * **Examples:** Rent control, pharmaceutical costs, staple foods, energy prices * **Impact:** * Queuing * Assessment of Needs * Lottery system * Discrimination * **Incentives:** Maximum prices disincentivize firms to produce and may lead to quality cuts, potentially creating (or encouraging) illegal secondary markets. **Minimum Prices:** * **Examples:** Minimum alcohol prices. * **Impact:** * Decrease in consumer surplus * Increase in producer surplus * Government spending to purchase excess supply **Taxes and Consumer and Producer Surplus** * **Impact of unit tax in inelastic demand:** * Government revenue = (P2 - P3) \* Q2 - (Vertical distance between supply curves \* Q2) * Higher consumer burden relative to producer burden if demand is inelastic. Consumers are willing to pay a higher price. * If the lines are parallel, a unit tax implies a constant tax per unit. * **Impact of ad valorem tax:** A percentage of a good's value. For example, 20% tax. **Subsidies:** Government payments to incentivize production. Reduction of firm costs of production causing an outward supply shift leading to welfare gains. **Impact of Subsidies on Elasticity** * **Inelastic:** Subsidies have little effect on quantity supplied. * **Elastic:** Subsidies promote an increase in quantity supplied. **Graphs (with descriptions):** Several graphs are included illustrating supply and demand curves, illustrating the impact of various government interventions on price and quantity. These diagrams show changes in consumer and producer surplus before and after government intervention, as well as how the changes depend on the elasticity of demand and supply. **Equilibrium:** A table representing different equilibrium conditions. More information about the situation and the type of equilibrium is needed to complete it.