Unformatted text preview:

Principles of Microeconomics: Chapter 6Price controls are usually enacted when policymakers believe that themarket price of a good or service is unfair to buyers or sellers. Price ceiling: a legal maximum on the price at which a good can be soldPrice floor: a legal minimum on the price at which a good can be soldPrice Ceilings:When the price ceiling is above the equilibrium price, it is not binding. It has no effect on price or quantity sold. When the price ceiling is below the equilibrium price, it is a binding constraint. Price cannot rise higher, resulting in a shortage. When the government imposes a binding price ceiling on a competitive market, a shortage of the good arises, and sellers must ration the goods among the large number of potential buyers.^rationing mechanisms are unfair and inefficient; a free market rationsgoods with prices. Ex: Rent control: goal to make housing more affordable to the poor. But, is highly inefficient. In the long run, the buyers and sellers of rental housing respond more to market conditions as time passes.Landlords respond to low rents by not building more apartments and failing to maintain existing ones. Buyers are encouraged to find their own apartments and more people move to the city. Supply and demand become more elastic. Price Floors:When the price floor is below the equilibrium price, it is not binding. It has no effect on price or quantity sold. When the price floor is above the equilibrium price, it is a binding constraint. Price cannot fall lower to hit equilibrium, resulting in a surplus. When the government imposes a binding price floor on a competitive market, a surplus of the good arises, and sellers are unable to sell all they want. ^rationing also unfair (plays on biases); a free market allows sellers tosell all they want. Governments use price controls because they view the market's outcome as unfair. But price controls often hurt those they are trying to help: rent control causes poor housing quality and a shortage of housing; minimum wage causes unemployment. Taxes:When the government levies a tax on a good, who bears the burden?Tax incidence: the manner in which the burden of a tax is shared among participants in a market. Determining How Taxes on Sellers Affect Market Outcomes: 1. Decide whether the law affects supply or demand curve.2. Determine which way the curve shifts. 3. Examine how the shift affects equilibrium price and quantity.Ex: $.50 tax on ice cream sellers1. Tax is not levied on buyers, so demand does not change. Supply isaffected. 2. Tax raises cost of production, so supply decreases, shifting to the left (in addition, the profit price of any good will be $.50 lower, therefore the market price must now be $.50 higher than that profit to compensate for the deficit). 3. Equilibrium price will rise, equilibrium quantity will fall. Size of the ice-cream market will decrease. Implications: Buyers and sellers share the burden, both are worse off.•Taxes discourage market activity. When a good is taxed, quantity sold is smaller. • Buyers and sellers share the burden of taxes. In the new equilibrium, buyers pay more and sellers receive less. Determining How Taxes on Buyers Affect Market Incomes:See above stepsEx. $.50 tax on ice cream buyers1. Tax impacts demand, demand will change. 2. Tax makes buying less attractive, demand will decrease and shift left (in addition, price is effectively $.50 more to buyers, demand a quantity of ice cream as if the market price were $.50 more, making actual market price $.50 lower to make up for the tax). 3. Equilibrium price falls, equilibrium quantity falls. Implications: Buyers and sellers share the burden.Taxes levied on sellers and taxes levied on buyers are equivalent. Payroll tax: a tax on the wages that firms pay workers. ^places wedge in between the wage firms pay workers and the wage workers receive. Wage received by workers falls, wage paid by firmsrises. Elasticity and Tax Incidence:With an elastic supply and inelastic demand, the tax burden will fall more heavily on consumers because they have fewer options. With an inelastic supply and elastic demand, the tax burden will fall more heavily on sellers because they receive much less profit.A tax burden falls more heavily on the side of the market that is less elastic. ^due to the unwillingness of buyers or sellers to leave the market when conditions are unfavorable; no


View Full Document

NU ECON 1116 - Chapter 6

Download Chapter 6
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 6 and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 6 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?