Chapter 6 - Supply, Demand, and Government Policies

Price Control

government-mandated restrictions on the prices of goods and services, designed to keep them from fluctuating naturally with supply and demand

Price Ceiling

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

Binding

if a price control keeps the price in the market from reaching the equilibrium price level

Rent Controls

a government program that places a legal limit on the maximum price that can be charged for a leased home or apartment

Price Gouging

refers to a seller sharply increasing the price of essential goods or services to an "unconscionably excessive" level during a declared emergency or crisis

Where in Market is a Price Ceiling Binding

when the price ceiling is set below the equilibrium market price

Price Floor

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

Resource Market

the market for inputs used to produce goods and services

Minimum Wage

a government-mandated price floor for labor, establishing the lowest hourly rate employers can legally pay their employees

Arguments In Favor of Raising Minimum Wage

• Increasing Spending

• Better Living Conditions

• Bordering States have Higher Minimum Wages

Arguments Against Raising Minimum Wage

• Could Cause Inflation

• Oversaturate Market

• Small Businesses may not be able to Afford it

• Can increase high school drop out rate

Where in the Market is Price Floor Binding

When the price floor is set above equilibrium market price

Reasons Government Taxes

• To generate revenue

• Protectionist Trade Policy (tariff)

• To alter a behavior or activity that generates negative externalities

Excise Tax

federal or state tax placed on the sale or manufacture of a commodity

Sales Tax

a consumption tax placed on the sale of goods and services

Tax Base

The level of quantity of an economic activity that is taxed. Higher tax rates reduce the level of the tax base because they make the activity less attractive.

Tax Rate

the per unit amount of the tax or the percentage rate at which the economic activity is taxed

Tax Liability

dollar amount paid in taxes

Gasoline Taxes

a specific excise tax on gasoline, often used as both a user fee to fund road and infrastructure maintenance and a tool to account for externalities like pollution and congestion

Alcohol Taxes

an excise tax, also known as a "sin tax," levied on alcoholic beverages to correct for the negative social costs (or negative externalities) associated with their consumption

Cigarette Taxes

a form of excise or sin tax applied to tobacco products, aiming to both raise government revenue and discourage consumption by increasing the price

Smuggling

illegal movement of goods

Legal Tax Incidence

refers to the party—buyer or seller—that is legally responsible for paying a tax to the government

Actual Tax Incidence

economic analysis of how the actual burden of a tax is distributed among consumers, producers, and other groups, which is often different from who is legally required to pay it

Tax Burden

economic impact of a tax on individuals or firms

Payroll Taxes

taxes taken directly from pay checks and assessed at the federal, state, and local level

Average Tax Rate

Tax liability divided by taxable income. It is the percentage or income paid in taxes.

Marginal Tax Rate

The additional tax liability a person faces divided by their additional taxable income. It is the percentage of an extra dollar of income earned that must be paid in taxes. 

Progressive Tax

A tax in which the average tax rate rises with income. People with higher incomes will pay higher percentage of their income in taxes.

Proportional Tax

A tax in which the average rate is the same at all income levels. Everyone pays the same percentage of income in taxes.

Regressive Tax

A tax in which the average rate falls with income. People with higher incomes will pay smaller percentage of their income in taxes.

Ability-to-Pay Principle of Taxation

the economic theory that the amount of tax an individual or entity pays should be proportional to their financial capacity to bear the tax burden

Benefit Principle of Taxation

the idea that taxes should be paid by individuals in proportion to the government services and benefits they receive