Government Policy, Taxes and Welfare

Flashcards on government policy, taxes, and welfare economics.

Price Ceiling

A legal maximum on the price at which a good can be sold.

Price Floor

A legal minimum on the price at which a good can be sold.

Binding Price Ceiling

A price ceiling set below the equilibrium price, leading to a shortage because quantity demanded exceeds quantity supplied.

Binding Price Floor

A price floor set above the equilibrium price, leading to a surplus because quantity supplied exceeds quantity demanded.

Tax Incidence

The manner in which the burden of a tax is shared among participants in a market.

Tax on Sellers

Shifts the supply curve upward by the size of the tax.

Tax on Buyers

Shifts the demand curve downward by the size of the tax.

Tax Burden

Tax = price paid by buyers - price received by sellers.

Elasticity and Tax Burden

A tax burden falls more heavily on the side of the market that is less elastic.

Consumer Surplus (CS)

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

Producer Surplus (PS)

The amount a seller is paid for a good minus the seller’s cost of providing it.

Total Surplus

CS + PS = value to buyers - cost to sellers.

Efficient Allocation of Resources

Maximizes total surplus.

Competitive Equilibrium

Efficient because it maximizes total surplus.

Deadweight Loss (DWL)

The reduction in total surplus that results from a market distortion, such as a tax.