Microeconomics: Theory and Applications with Calculus, 4e

9.4 Policies That Shift Supply Curves

One of the main reasons that economists developed welfare tools was to predict the impact of government programs that alter a competitive equilibrium. Virtually all government actions affect a competitive equilibrium in one of two ways. Some government policies shift the demand curve or the supply curve, such as a limit on the number of firms in a market. Others, such as sales taxes, create a wedge or gap between price and marginal cost so that they are not equal, even though they were in the original competitive equilibrium.

These government interventions move us from an unconstrained competitive equilibrium to a new, constrained competitive equilibrium. Because welfare was maximized at the initial competitive ...