Chapter 7: Price Controls and Taxes, Part 1

price control

a legal limit on how low or high the price of a good or service can be.

price ceiling

sets a maximum allowable price. Maximum prices that sellers are permitted to charge for a specific good or service.

price floor

sets a minimum allowable price

non-binding

if a price ceiling is set at or above equilibrium price, it’s considered non-binding because it doesn’t affect the market price or quantity sold.

binding

if price ceiling is set below the equilibrium price, it becomes, binding and causes a shortage. 

what can binding prices cause

shortages, reductions in product quality, wasteful lines and other search costs, a loss in gains from trade (DEADWEIGHT LOSS), a misallocation of resources

non binding (PRICE FLOORS)

if the price floor is sat at or below the equilibrium price, it will not affect the price or quantity exchanged.

binding (PRICE FLOORS)

if the price floor is above equilibrium price, it results in SURPLUS because sellers want to supply more than buyers demand.

unintended consequences of price floors

surpluses, lost gains from trade (DEADWEIGHT LOSS), wasteful increases in quality, a misallocation of resources

most common example of price floors and who does it effect?

minimum wage and effects workers with very low productivity (least experienced, least educated or trained- like teenagers lol) Surplus is this scenario is unemployment.

subsidy

negative tax

unit taxes

a fixed dollar amount charged per unit sold, differs from percentage based tax.

what occurs when buyers are required to pay a tax?

they reduce their demand for the taxed good, the demand curve shifts down and to the left

What are the key takeaways from tax on buyers

taxes discourage market activity (reducing quantity bought and sold), and both buyers and sellers share the burden of tax (each is worse off when buyers are taxed.)

what is the difference in how tax levied against buyers and sellers impact

no difference, it is identical, whether the tax is applied to buyers or sellers the market outcome is the same regardless of who pays the tax.

commodity tax

a tax on goods,

what are three important ideas about commodity taxation

who pays the tax does not depend on who writes the check to the govt, who pays the tax does depend on the relative elasticities of demand and supply, commodity taxation raises revenue and creates lost gains from trade (dead weight loss)

does politics or the legal bearing of a tax impact the economics

not legal bearing has no economic incidence. who formally pays the tax (statutory burden) doesn’t determine the economic burden.

what does the economic burden of tac, also known as tax incidence depend on?

It depends on how price and quantity respond also known as elasticity. 

who bears the tax burden when supply is more elastic than demand?

buyers bear more of the tax burden. Because sellers can easily exit the market or reduce supply, while buyers have fewer substitutes or alternatives.

who bears the tax burden when demand is more elastic than supply?

sellers buy more of the tax burden because buyers can more easily switch to alternatives to avoid lower prices,