Economics of Price Controls and Taxes

These flashcards cover key concepts related to price controls, taxes, and their effects on market outcomes and economic activity.

Price controls

Policies set by the government to regulate the prices of goods and services which can create inequities.

Price Ceiling

A legal maximum price at which a good can be sold, for example, rent control.

Binding constraint

A price ceiling set below the equilibrium price, causing shortages.

Rationing mechanisms

Methods used to distribute scarce goods, such as long lines or discrimination.

Price Floors

A legal minimum price at which a good must be sold, such as minimum wage.

Adverse effects of price ceilings

Shortages and reduced incentives for landlords leading to poor maintenance of rental properties.

Competitive markets

Markets where supply and demand determine prices, considered most efficient.

Tax incidence

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

Payroll Taxes

Taxes deducted from earnings, shared between firms and workers.

Elasticity and tax burden

The principle that the side of the market that is less elastic bears a greater tax burden.