Micro Wk4: Government Policies

Price controls are government-imposed restrictions on the prices charged for goods and services.
The intent is to:
- Maintain affordability
- Ensure minimum income for providers
- Achieve a living wage
Types of price controls:
- Price ceiling: A legal maximum price.
- Price floor: A legal minimum price.

A price ceiling has two possible outcomes:
- Non-binding: If the ceiling is above the equilibrium price, it has no effect.
- Binding: If the ceiling is below the equilibrium price, it causes a shortage.

Rent caps can lead to:
- Shortages of rental properties
- Discouragement of private investment
- Privileged class of rent-controlled tenants
Example: Greens MP Jenny Leong's bill to cap rents in line with inflation.
Economist Saul Eslake’s view: Short-term fix, ineffective, discourages investment.
Graphical representation:
- (a) Rental market without rent caps: Equilibrium at Pe and Qe.
- (b) Rental market with binding rent caps: Shortage occurs because quantity demanded exceeds quantity supplied.

A price floor also has two possible outcomes:
- Non-binding: If the floor is below the equilibrium price, it has no effect.
- Binding: If the floor is above the equilibrium price, it causes a surplus.

Minimum-wage laws prevent employers from offering wages below a certain level.
Potential effect: Increased unemployment among unskilled workers.
Australia: The Fair Work Commission reviews the National Minimum Wage annually.
As of 1 July 2024, the National Minimum Wage is 24.10 per hour.
Graphical representation:
- (a) Free labor market: Equilibrium wage and quantity of labor.
- (b) Labor market with binding minimum wage: Surplus of labor (unemployment).

Governments use taxes to raise revenue for public projects and services.
Analysis includes:
- Tax levied on sellers
- Tax levied on buyers
Study focuses on:
- How taxes affect market equilibrium
- Who bears the burden of the tax (tax incidence).

A tax on sellers is like an additional production cost.
The supply curve shifts upward by the amount of the tax.
The new equilibrium has a lower quantity and a higher price.
- Equilibrium price increases by less than the tax amount.
Example: A 0.50 tax on ice cream sellers.
- The supply curve shifts up by 0.50. Original equilibrium at (100, $3.00). New equilibrium at (90, $3.30).

A tax on buyers requires buyers to pay the tax amount to the government for each unit bought.
The demand curve shifts downward by the amount of the tax.
The new equilibrium has a lower quantity and a lower price.
- The equilibrium price decreases by less than the tax amount.
Buyers pay the price to the seller plus the tax to the government.
Example: A 0.50 tax on ice cream buyers.
- The demand curve shifts down by 0.50. Quantity decreases.

Taxes change the market equilibrium.
Quantity traded is lower, regardless of who the tax is levied on.
- Taxes discourage market activity.
- Taxes are necessary for public revenue (no free lunch).
Buyers pay more, and sellers receive less, regardless of whom the tax is levied on.
Buyers and sellers share the tax burden.

Tax incidence: Division of the tax burden between buyers and sellers.
General Rule: The burden falls more heavily on the less elastic side of the market.

Identifying buyer and seller prices without shifting curves:
- Find two points, on D and S, with a distance equal to the tax size.
Demand less elastic than supply: Burden falls more on consumers.
Supply less elastic than demand: Burden falls more on producers.

A subsidy is a payment from the government to consumers or sellers for each unit bought or sold.
Subsidies are negative taxes.

Market outcomes are identical if the subsidy is paid to buyers instead of sellers.
Regardless of who receives the subsidy:
- Quantity traded is higher.
- Subsidies encourage market activity.
- Buyers pay less, and sellers receive more.
Subsidy incidence: The less elastic side of the market receives the larger part of the benefit.

First Home Owner Grant schemes are subsidies paid to buyers purchasing their first residence.
Introduced in 2000 to offset the GST effect on home ownership.
- Example: 7000 subsidy for first-time home buyers.
Demand of first home buyers is relatively elastic.
Supply of housing is relatively inelastic.
Sellers gain most of the benefit because supply is less elastic.

Price ceilings and price floors:
- Binding price ceilings cause shortages.
- Binding price floors cause surpluses.
Taxes and subsidies:
- Taxes reduce the quantity traded.
- Subsidies increase the quantity traded.
Tax/Subsidy Incidence:
- Depends on buyers' and sellers' elasticity, not on whom the tax/subsidy is imposed.
- With taxes, the burden falls on the less elastic side.
- With subsidies, the benefit goes to the less elastic side. Specifically, if the demand is more elastic than the supply, most the benefit goes to the sellers. If the supply is more elastic than the demand, most of the benefit goes to the buyers.