Chapter 6 – Taxes, Price Controls, and Quantity Regulations

32 vocabulary flashcards covering the major definitions, rules, and examples from Chapter 6 on taxes, subsidies, price controls, and quantity regulations.

Government Intervention in Markets

The use of laws, regulations, or taxes to influence market-determined prices and quantities.

Statutory Burden

The legal obligation assigned by the government to remit a tax payment.

Economic Burden

The change in after-tax prices that buyers and sellers actually experience due to a tax.

Tax Incidence

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

Price Elasticity (of Demand or Supply)

A measure of how responsive quantity demanded or supplied is to a change in price.

Inelastic Curve

A demand or supply curve that is relatively steep, indicating low responsiveness to price changes.

Elastic Curve

A demand or supply curve that is relatively flat, indicating high responsiveness to price changes.

Soda Tax

A per-unit tax on sugar-sweetened beverages intended to raise consumer prices and reduce consumption.

Tax on Sellers

A tax in which sellers are legally responsible for remitting the payment; shifts the supply curve upward by the tax amount.

Tax on Buyers

A tax in which buyers are legally responsible for remitting the payment; shifts the demand curve downward by the tax amount.

More-Inelastic-Pays Rule

The principle that the side of the market with the more inelastic curve bears the larger share of a tax.

Four-Step Recipe for Evaluating Taxes

(1) Identify the curve that shifts; (2) Determine direction of shift; (3) Compare pre- and post-tax equilibrium; (4) Judge relative elasticities to find incidence.

Subsidy

A government payment to those who undertake a specific action; a negative tax that raises quantity and moves prices in opposite directions for buyers and sellers.

Pell Grant

A U.S. federal subsidy that helps lower-income students pay college expenses, increasing higher-education enrollment.

Child-Care Subsidy Example

A $3,000 payment to parents that shifts demand for child care rightward, raising quantity and splitting benefits between parents and providers.

Price Ceiling

A legally established maximum price that sellers may charge.

Binding Price Ceiling

A ceiling set below equilibrium price, creating a shortage and preventing the market from reaching its natural equilibrium.

Rent Control

A price ceiling applied to housing rents, often causing apartment shortages and quality deterioration.

Price Floor

A legally established minimum price that sellers may charge.

Binding Price Floor

A floor set above equilibrium price, creating a surplus and preventing the market from reaching its natural equilibrium.

Minimum Wage

A labor-market price floor that sets the lowest legal hourly wage employers can pay.

Scotland’s Alcohol Floor

A policy setting a minimum price for alcoholic drinks to curb consumption, resulting in surplus supply.

Quantity Regulation

A rule that sets a mandatory minimum or maximum quantity that can be bought or sold.

Mandate

A regulation requiring buyers or sellers to trade at least a specified minimum quantity.

Quota

A regulation that limits the maximum quantity that can be bought or sold.

Binding Mandate

A mandate set above equilibrium quantity, forcing the market to trade more than it otherwise would.

Binding Quota

A quota set below equilibrium quantity, forcing the market to trade less than it otherwise would.

Zoning Quota (Seattle Example)

Land-use rules that cap housing supply, raising home prices by limiting construction.

Supply Curve

A graph showing the relationship between price and quantity that producers are willing to sell; also represents marginal cost.

Demand Curve

A graph showing the relationship between price and quantity that consumers are willing to buy; also represents marginal benefit.

Shortage

A situation in which quantity demanded exceeds quantity supplied at a given price, common under binding ceilings.

Surplus

A situation in which quantity supplied exceeds quantity demanded at a given price, common under binding floors.