EC 201 Chapter 6: Government Intervention

A tax on sellers will shift the

supply curve upward (left) by the amount of the tax

A tax on sellers leads to a decline in

the quantity sold

A tax on sellers ________ the price buyers pay and _________ the price sellers receive

increases; decreases

Who bears the economic burden of a tax on sellers?

Both buyers and sellers

A tax on buyers shifts

the demand curve down by the amount of the tax

A tax on buyers leads to a decline in

the quantity sold

A tax on buyers _______ the price buyers pay and _______ the price sellers receive

increases; decreases

Who bears the economic burden of a tax on buyers?

Both buyers and sellers

It doesn't matter who has the statutory burden of the tax because

they both have the same economic effect

When the government levies a tax, buyers buy ____, sellers sell ____, and prices are ______ for buyers and _____ for sellers

less; less; higher; lower

Tax incidence depends on your ability to _____ _____— the more that you can avoid the tax, the less of it you will pay (and thus the lower your ________ ______)

avoid taxes; economic burden

Sellers bear a smaller share of the economic burden when supply is relatively ______

elastic

Buyers bear a smaller share of the economic burden when demand is relatively ______

elastic

The factor that is more ______ will have a smaller share of the economic burden

elastic

Three steps for evaluating taxes:

1) Is the supply or demand curve shifting?

2) Is the shift an increase in taxes (shifting the curve to the left)? Or is the shift a decrease in taxes (shifting the curve to the right)?

3) How will prices and quantities change in the new equilibrium?

Subsidy

A payment made by the government to those who make a specific choice

A subsidy to consumers always increases demand by raising consumers' marginal benefit by the amount of the subsidy

Binding price ceiling

A price ceiling that prevents the market from reaching the market equilibrium price, meaning that the highest price sellers can charge is set below the equilibrium price

Price ceilings ______ prices, but cause ________

lower; shortages

Binding price floor

A price floor that prevents the market from reaching the equilibrium price, meaning that the lowest price that sellers can charge is above the equilibrium price

Price floors ______ prices, but cause ________

raise; surpluses

Quantity regulation

A minimum or maximum quantity that can be sold

Mandates

A requirement to buy or sell a minimum amount of a good

Quotas

A limit on the maximum quantity of a good that can be sold

Quotas _____ prices

raise

Taxes, price regulations, and quantity regulations can all be used to achieve the _____ policy objectives

same

The statutory burden of a tax or subsidy does not determine the

economic burden

What determines economic burden?

the price elasticities of supply and demand

Taxes ________ the quantity sold, while subsidies ________ the quantity sold

reduce; increase

Quotas _______ the quantity sold, while mandates _______ the quantity sold

reduce; increase