ECON 1101 Price Floors and Ceilings

Statutory Burden: Refers to the official assignment of a tax obligation to a particular group, namely sellers or consumers.
- The significance of this concept lies not in who is statutorily assigned to pay the tax, but in determining who ultimately bears the burden of the tax.
- The burden of the tax is borne by whoever remains in the market with inelastic demand or supply; those with more inelastic responses will end up paying more taxes.

Elasticity refers to how responsive the quantity demanded or supplied is to changes in price.
- Higher inelasticity in demand/supply implies that consumers/producers pay a greater share of the tax burden.
Examples of Elastic versus Inelastic Demand:
- Young smokers demonstrate elastic demand; in response to tobacco taxation, many choose to quit smoking or substitute with alternatives.
- Older smokers exhibit more inelastic demand; they are less likely to reduce consumption drastically, leading to a greater likelihood of continuing to smoke even with higher prices.

Imposing a tax on cigarettes results in a price increase, which is intentional to decrease cigarette consumption.
- By raising prices, the tax serves two purposes: to discourage unhealthy consumption and to generate tax revenue.
Effect on Consumption:
- Consumption among younger, more elastic smokers declines significantly following a tax due to their responsiveness to price changes.
- Consumption changes less dramatically for older, addicted smokers, who are less price sensitive.

A study from the Journal of Population Economics found differing relationships between cigarette smoking and cannabis consumption based on age group:
- Young smokers tend to view cigarettes and cannabis as complements; reduction in cigarette consumption correlates with a reduction in cannabis use.
- Older smokers view them as substitutes; a decrease in cigarette consumption increases cannabis consumption.

Tax revenue can still be generated even if consumption does not drop significantly, especially in cases of inelastic demand.
Tax burden distribution among consumers and producers:
- Under elastic demand (younger smokers), producers (sellers) tend to bear more tax burden.
- Under inelastic demand (older smokers), the consumers bear a larger tax burden.

Taxes on goods lead to decreased consumption and reduced production overall.
Income taxes can lead to decreased economic activity, raising questions about tax fairness and its impact on work incentives.
Taxes on consumption are also positioned as a means to drive behavioral change for health or environmental reasons, illustrating a dual purpose of taxation.
- Example: Tax on gasoline applied to reduce pollution.

A tax on gasoline represents an approach to internalize the externalities associated with pollution.
- When a $0.10 tax is imposed on gasoline:
  - The supply curve shifts left due to increased production costs.
  - The new market equilibrium results in higher prices for consumers and decreased quantities consumed.
  - Tax burden is split between consumers (who pay higher prices) and producers (who receive lower prices).

In 2022, Canada imposed a 20% luxury tax on luxury goods. This tax seeks to ensure that wealthier individuals contribute more.
- The elasticity of demand for luxury goods typically leans toward elastic, meaning producers may bear a larger share of the tax burden compared to affordable goods.

Price Ceiling: Sets a maximum allowable price for a good, creating potential shortages.
- For example, rent control operates as a price ceiling; if set below equilibrium price, it results in fewer apartments available leading to increased demand and a resultant shortage.
Price Floor: Sets a minimum allowable price, often leading to surpluses.
- An illustrative example is the minimum price floor on agricultural products, such as milk, which can lead to surplus milk production that may go unsold, causing various economic complications.

Taxes and subsidies, while often reactive to market conditions, require careful consideration of their long-term impacts on markets and economic behavior.
Understanding elasticity, statutory burden, and market dynamics is vital for predicting outcomes of taxation and regulation.
Exam preparation should focus on the effects of taxation and the role of price ceilings and floors, as well as their implications on market equilibrium and economic behavior.