When Governments Intervene in Markets

These flashcards cover key concepts related to how government intervention in markets affects supply, demand, and economic outcomes.

What is the effect of a tax on sellers on the supply curve?

A tax on sellers shifts the supply curve to the left to reflect higher marginal costs.

How do taxes affect market outcomes?

Taxes reduce quantity, raise prices buyers pay, and lower prices sellers receive.

What is a price ceiling?

A price ceiling is the maximum price that sellers can charge, typically set below equilibrium.

What happens when a binding price ceiling is implemented?

A binding price ceiling creates persistent shortages in the market.

What is a price floor?

A price floor is the minimum price that buyers can pay, usually set above equilibrium.

What is the effect of a binding price floor on a market?

A binding price floor creates a surplus in the market.

What is tax incidence?

Tax incidence is the distribution of the economic burden of a tax between buyers and sellers.

How does the price elasticity of demand affect tax incidence?

Buyers with less elastic demand bear a larger share of the tax burden.

How does the price elasticity of supply affect tax incidence?

Sellers with less elastic supply bear a larger share of the tax burden.

What is a quota?

A quota is a regulation that sets a maximum quantity of a good that can be sold.

What is the key takeaway regarding subsidies?

Subsidies increase quantity, reduce prices buyers pay, and raise prices sellers receive.

What always happens to market quantity and prices with price regulations?

With price regulations, the new price will be the regulated price and quantity will be the minimum of quantity demanded or supplied.