ECON 111 - Chapter 6: Taxes, Price Controls, and Quantity Regulations

Government Intervention in Markets

Actions by the government that influence market prices and quantities through taxes, subsidies, price controls, and quantity regulations.

Statutory Burden

The party responsible for sending tax payments to the government.

Economic Burden

The actual impact of the tax on buyers and sellers due to price changes.

Tax Incidence

The division of the economic burden of a tax between buyers and sellers.

Elasticity

A measure of how responsive buyers and sellers are to price changes, influencing tax incidence.

Tax on Buyers

A tax that shifts the demand curve downward by the amount of the tax.

Tax on Sellers

A tax that shifts the supply curve upward by the amount of the tax.

Final Market Impact

The result of a tax on both buyers and sellers, leading to a higher price for buyers, a lower price received by sellers, and a reduced quantity traded.

Soda Tax Example

A tax of $0.20 per litre where buyers pay $0.15 more and sellers receive $0.05 less, resulting in a tax incidence of 75% buyers and 25% sellers.

Subsidy

A payment from the government to encourage consumption or production, shifting the demand or supply curve outward.

$5,000 Subsidy for Electric Cars

A government payment that shifts the demand curve right, resulting in more cars sold at a lower price for consumers and a higher price for sellers.

Price Ceiling

A maximum price set by the government, which can create shortages if it is binding.

Binding Price Ceiling

A price ceiling set below the equilibrium price, resulting in a shortage.

Price Floor

A minimum price set by the government, which can create surpluses if it is binding.

Binding Price Floor

A price floor set above the equilibrium price, resulting in a surplus.

Price Ceiling on Cancer Drugs Example

A price ceiling of $6,000 instead of $10,000 leads to a shortage with 2,000 demanded and only 500 supplied.

Price Floor on Alcohol in Scotland Example

A price floor of $1.50 per can instead of $1.00 results in fewer purchases but more suppliers wanting to sell, creating a surplus.

Quantity Regulation

A government-imposed limit or requirement on how much can be bought or sold.

Mandate

A minimum quantity that must be bought or sold, such as health insurance requirements.

Quota

A maximum quantity that can be bought or sold, such as taxi medallions or China's one-child policy.

Housing Mandates Example

Regulations requiring developers to build a minimum amount of affordable housing.

Taxi Quotas in NYC Example

Limits taxi licenses to 13,600, restricting supply and raising fares.

China's One-Child Policy Example

A strict population control policy limiting births.

Comparing Market Regulations

An overview of different types of market regulations and their effects on market behavior.

Key Insights on Tax Burden

The more inelastic side bears more of the tax burden.

Key Insights on Subsidy Benefits

The more inelastic side captures more of the subsidy.

Effects of Price Controls

Binding price ceilings lead to shortages, while binding price floors lead to surpluses.

Effects of Quantity Regulations

Quantity regulations control market transactions, either forcing more trade (mandates) or limiting trade (quotas).