Ch6: Taxes, Prices Controls, and Quantity Regulations

Chapter Overview

• Chapter 6: Taxes, Prices Controls, and Quantity Regulations

• Instructor: Mumtaz Ahmad

• Notes are summaries to complement class attendance.

Key Concepts Covered

• How Taxes and Subsidies Change Market Outcomes

• Price Regulations

• Quantity Regulations

Government Intervention in Markets

• Supply and demand usually determine prices and quantity sold.

• Government influences market outcomes through laws, regulations, and taxes.

  • Example: Minimum wage impacts pay; taxes affect take-home pay and buying prices.

• Government shapes costs and benefits, affecting buyer and seller decisions.

Taxes and Market Outcomes

Tax Effects on Market

• Assess how taxes shape supply, demand, and equilibrium outcomes.

  • Taxes create a disparity between the price buyers pay and the price sellers receive.

Case Study: Soda Tax

• Governments implement soda taxes to combat health issues like diabetes and heart disease.

• Effects:

  • Increases consumer prices.

  • Reduces sales, affecting seller revenues.

  • Tax component leads to a difference between buyers’ and sellers’ prices.

Tax on Buyers vs. Sellers

Example: Soft Drink Tax in Québec

• Tax on Buyers:

  • Tax of 20 cents per litre added at checkout; consumers pay the tax when purchasing.

• Tax on Sellers:

  • Sellers post prices without tax; they send tax to government, keeping less per sale.

Key Definitions

Tax Burden Concepts

• Statutory Burden: Obligation assigned by the government to remit tax.

• Economic Burden: Change in after-tax prices faced by buyers/sellers.

• Tax Incidence: Distribution of economic burden between buyers and sellers.

Tax Incidence Insights

• Who Pays?: Economic burden does not depend solely on statutory burden.

• Elasticity Matters:

  • The more inelastic a curve (supply or demand), the higher the burden it bears.

Analyzing Tax Impact

• Plan:

  • Assess $0.20 tax on both buyers and sellers.

  • Outcome comparison: Results are identical.

Tax Impact on Buyers

• Buyers face a marginal benefit decrease by $0.20.

• Demand curve shifts down by $0.20, leading to price adjustments and decreased quantity purchased.

• New equilibrium reflects decreased purchases and differential pricing:

  • Price Buyers Pay: $1.70

  • Price Sellers Receive: $1.50

Tax Impact on Sellers

• Higher marginal costs due to tax lead to a $0.20 supply curve shift up.

• New equilibrium results mirror the buyer scenario regarding price differentials and quantity sold.

Results and Analysis

• In both buyer and seller taxation scenarios, consumers ended up paying $0.15 of the $0.20 tax.

• Seller's received $0.05 less, indicating a shared tax burden influenced by elasticity relationships.

Understanding Subsidies

Definition

• Subsidy: Government payments that incentivize specific consumer or seller behavior.

• Subsidies function oppositely to taxes, increasing demand and supply.

• Example: Canada’s $5,000 subsidy for electric vehicles encourages purchase.

Assessing Subsidy Impact

• Follow the same evaluation steps as taxes, focusing on equilibrium changes and elasticity effects.

• More inelastic parties benefit more from subsidies, shifting demand curves higher.

Price Regulations

Price Ceilings

• Maximum allowable price set by the government.

• Binding price ceilings restrict prices below equilibrium, leading to shortages.

• Example: Maximum price for cancer drugs at $6,000 results in demand exceeding supply.

Price Floors

• Minimum price set by the government.

• Binding price floors prevent prices from dipping below equilibrium, causing surpluses.

• Example: Minimum wage legislation sets the lowest labor price, helping low-wage workers.

Quantity Regulations

Definitions

• Mandate: Minimum required amount to purchase or sell.

• Quota: Maximum limited amount that can be transacted.

Impact of Regulations

• Binding regulations enforce changes in market outcomes, anchoring price adjustments based on the level of supply and demand.

Conclusion and Takeaways

• Tax and subsidy burdens depend heavily on market elasticities.

• Understanding price and quantity regulations is vital for economic policy assessment.

• Effective evaluation of taxation and subsidy impacts requires analyzing elasticities, statutory burdens, and market responses.