Econ 201 1st Edition Lecture 17Outline of Last Lecture 1.government policiesOutline of Current Lecture 1.government policies~Current LectureHow Price Controls May Hurt Intended BeneficiaryPrice FloorSome sellers are willing to accept P* but cannot find buyers. Frustrated sellers ~ price floor hurts them.Price CeilingSome buyers are willing to pay P* but cannot find sellers. Frustrated buyers ~ price ceiling hurts them.Note: Both Floors and Ceilings cause decrease of market quantity.Analysis of Simple Tax ~ Unit Excise Tax• Tax rate, T, is in $/unit of the good. – e.g. $/gallon of gasoline or $/case of beer• Tax revenue is rate times units sold: TxR = T x QT• A tax reduces market size: QT < Q*These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.• Legal Incidence: Who is responsible to pay tax to the government?– Either Buyers or Sellers.– Typically on Sellers ~ Cheaper to administer tax collection.• Economic Incidence: Who bears the burden of the tax?– Usually shared between Buyers and Sellers.– Evaluated as price change before & after tax is imposed.Analysis of Simple Tax ~ Shifting Burden• Actors with legal obligation try to shift burden to other side of market.– Sellers raise price required from buyers.– Buyers decrease price offered to sellers.• Economic Incidence is independent of Legal Incidence.• Two price effects of a tax – Raises price buyers pay: PB > P* – Lowers price sellers receive: PS < P*– Tax rate is difference of the prices: T = PB – PS• Economic Incidence – On buyers: PB – P* – On sellers: P* – PS• Ability to shift burden depends on price elasticities: ED and
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