Government Intervention

Governments intervene in markets to correct market failure, raise revenue, redistribute income, and support particular producers or consumers. The main microeconomic tools are price controls, indirect taxes, and subsidies. Each alters the free-market outcome and creates winners and losers among stakeholders.

Price ceilings

A price ceiling is a maximum legal price set below the equilibrium price, typically to make essential goods such as food, rent, or medicine more affordable. Because the controlled price lies beneath equilibrium, quantity demanded exceeds quantity supplied, producing a persistent shortage. On a diagram, a horizontal line drawn below the equilibrium price cuts the demand curve at a large quantity demanded and the supply curve at a smaller quantity supplied; the horizontal