ECON 1-Introduction to Economics, Chapter 6: Price Controls and Taxation

Flashcards covering key vocabulary related to price controls, including price ceilings, price floors, and the effects of taxation on markets and tax incidence based on elasticity.

Price Controls

Government-mandated legal minimum or maximum prices set for specific goods or services to allocate scarce goods among households.

Price Ceiling

The maximum price that sellers may charge for a good, often set by the government.

Effective Price Ceiling

A price ceiling that is set below the market equilibrium price, leading to a shortage.

Price Gouging

Raising prices on essential goods or services to an exploitative level, often during emergencies.

Price Floor

A minimum price below which a good cannot be purchased, typically set by the government above the equilibrium price.

Effective Price Floor

A price floor that is set above the market equilibrium price, leading to a surplus.

Taxation

The system by which governments collect revenues from households and firms to fund public programs and services.

Tax Burden

The ultimate economic cost of a tax, which may be shifted from the party legally responsible for paying it to others.

Excise Tax

A tax imposed on the production or sale of a specific good or service.

Supply Curve Shift (Tax on Producers)

A tax imposed directly on producers raises their costs, causing the supply curve to shift upward (or to the left) by the amount of the tax.

Demand Curve Shift (Tax on Consumers)

A tax imposed directly on consumers effectively lowers their willingness to pay, causing the demand curve to shift downward (or to the left) by the amount of the tax.

Tax Incidence

The division of the economic burden of a tax between buyers and sellers, determined by the elasticities of supply and demand.

Tax Incidence with Inelastic Demand

When demand for a taxed good is very inelastic, consumers bear a larger portion of the tax burden because they are not very responsive to price changes.

Perfectly Inelastic Demand (Tax Incidence)

In the case of perfectly inelastic demand (vertical demand curve), consumers bear the entire tax burden as they will not alter the quantity purchased regardless of price.

Tax Incidence with Elastic Demand

When demand for a taxed good is relatively elastic, producers bear a larger portion of the tax burden because consumers are highly responsive to price changes.

Perfectly Elastic Demand (Tax Incidence)

In the case of perfectly elastic demand (horizontal demand curve), producers bear the entire tax burden as they cannot charge more without losing all demand.

Government Tax Revenue

The total amount of money collected by the government from a tax, calculated by multiplying the tax per unit by the new equilibrium quantity sold.