Untitled Flashcards Set

Price Controls

Q: What is a price floor?

A: A government-imposed minimum price for a good or service, often leading to surpluses if set above equilibrium.

Q: How does a minimum wage affect the labor market for unskilled workers?

A: It can increase wages but may cause unemployment if set above the equilibrium wage.

Q: When does a minimum wage eliminate only a small number of jobs?

A: When demand for labor is inelastic or close to equilibrium.

Q: How do price floors affect competition in labor markets?

A: They can reduce hiring of less-skilled workers and increase employer discrimination.

Q: What are agricultural price supports?

A: Price floors for farm products that keep prices above equilibrium, often leading to government-purchased surpluses.

Q: How does Congress deal with agricultural surpluses?

A: By purchasing excess goods, storing them, exporting them, or distributing them domestically.

Q: What is a price ceiling?

A: A government-imposed maximum price, leading to shortages if set below equilibrium.

Q: How does a price ceiling affect rental housing?

A: It lowers rents but may reduce housing availability and lead to discrimination.

Q: How does a price ceiling affect gasoline markets?

A: It creates shortages, long lines, and possible black markets.

Q: How does supply elasticity affect surpluses from price floors?

A: The more elastic the supply, the larger the surplus.

Q: How does demand elasticity affect shortages from price ceilings?

A: The more inelastic the demand, the smaller the shortage.

Q: Does a fixed price cause a surplus or a shortage?

A: It depends on whether it is set above (surplus) or below (shortage) equilibrium.

Taxation

Q: What is tax incidence?

A: The distribution of a tax burden between buyers and sellers.

Q: What is tax liability?

A: The legal responsibility to pay a tax.

Q: What is the difference between progressive and regressive taxes?

A: Progressive taxes take a larger percentage from high incomes, while regressive taxes take a larger percentage from low incomes.

Q: What is tax shifting?

A: When the party legally responsible for a tax passes the burden to another party (e.g., businesses passing taxes to consumers via higher prices).

Q: What is the deadweight loss of a tax?

A: The economic inefficiency caused by a tax reducing the quantity of trade.

Q: What is the Laffer Curve?

A: A curve showing that increasing tax rates beyond a certain point reduces total tax revenue.

Q: What happens when the government imposes a per-unit tax on a good?

A: The price buyers pay increases, the price sellers receive decreases, and quantity sold decreases.

Q: How does tax elasticity affect who bears the tax burden?

A: - If demand is inelastic, buyers bear most of the 

Q: Why do payroll and income taxes mainly burden workers?

A: Because labor supply is relatively inelastic, so employers shift most of the tax burden to employees.

Q: Why is a land tax considered efficient?

A: Because land supply is perfectly inelastic, meaning taxation does not distort supply or create deadweight loss.

Q: If the demand for oil is perfectly elastic, will a tax on oil be efficient?

A: No, because any tax would cause buyers to completely stop purchasing.

Q: How does an oil tax affect workers in the oil industry?

A: It reduces wages and may lead to job losses.

Q: How does a subsidy on production affect prices and quantities?

A: - Lowers the price buyers pay. • Increases the price sellers receive.• Increases the qu

Q: What is more efficient: an agricultural subsidy or a price floor?

A: A subsidy, because it increases supply without causing a surplus.

Formulas & Key Relationships

Q: How do you calculate tax revenue?

A: Tax per unit × Quantity sold.

Q: How do you calculate deadweight loss (DWL)?

A: ½ × Tax per unit × Reduction in quantity.

Q: What is the effect of lowering tax rates on tax revenue?

A: If taxes are too high, lowering rates can increase revenue due to increased economic activity (Laffer Curve).