Managerial Economics and Strategy, 2/e

2.5 Effects of Government Interventions

Often governments are responsible for changes in market equilibrium. We examine three types of government policies. First, some government actions shift the supply curve, the demand curve, or both curves, which causes the equilibrium to change. Second, the government may use price controls that cause the quantity demanded to differ from the quantity supplied. Third, the government may tax or subsidize a good, which results in a gap between the price consumers pay and the amount sellers receive.

Policies That Shift Curves

Government policies may cause demand or supply curves to shift. Many governments limit who can buy goods. For example, many governments forbid selling alcohol to young people, which decreases ...