Government Action in Markets

Question 1

Price ceiling/price cap

Answer 1

gvt regulation to make it illegal to price higher than a specified level
**Only has an effect if it is set below Price Equilibrium

Question 2

Rent Ceiling

Answer 2

Set below Equilibrium = Housing Shortage
Marginal Social Beneft > Marginal Social Cost

Question 3

Are Rent Ceilings Fair

Answer 3

Rules: Unfair (not voluntary exchange)
Result: Does it benefit less welloff: No-other allocation methods used r/t scarcity

Question 4

Full Loss of a Rent Ceiling is Comprised of What

Answer 4

Deadweight Loss +
Increased Cost of Search Activity

Question 5

Labour Market Supply

Answer 5

Households
(Worker Surplus is bottom triangle)

Question 6

Labour Market Demand

Answer 6

Firms
(Firm surplus is top triangle)

Question 7

Price Floor

Answer 7

gvt regulation where it is illegal to charge a price lower than specified level
Only effect if it is ABOVE equilibrium

Question 8

Minimum Wage

Answer 8

Price floor applied to labour market
Set above equilibrium wage = Unemployment

Question 9

Is Minimum Wage Fair by Result

Answer 9

No
-unemployement
-jobs aren’t going to the poor
-other types of allocation set in

Question 10

Is Minimum Wage Fair by the Rules

Answer 10

No
-blocks voluntary exchange

Question 11

Tax Incidence

Answer 11

Division of burden of tax b/w buyers and sellers
If tax is included in price: burden on buyer
If tax is excluded from price: burden on seller

Question 12

When Tax is full burden on Buyer

Answer 12

Price of good rises to full amount of tax

Question 13

When tax burden is on seller

Answer 13

No change to price of good

Question 14

When Tax burden is on buyers and sellers

Answer 14

partial rise in price of good

Question 15

What does a tax on sellers do to supply

Answer 15

Decrease
Supply curve shifts Left
Equilibrium price + tax = new price sellers willing to take for old equilibrium quantity

Question 16

What does a sales tax do to Market Price and Quantity bought

Answer 16

Increases Market Price
Decreases Quantity bought

Question 17

What does a tax on buyers do to Demand

Answer 17

Decrease
Demand curve shifts down

Question 18

What do Taxes do to Efficiency

Answer 18

Inefficient
Underproduction
Marginal Social Benefit > Marginal Social Cost

Question 19

When can a tax be Efficient

Answer 19

If Supply and Demand are Inelastic

Question 20

Tax and Perfectly InElastic Demand

Answer 20

Burden will be on Buyers
No Underproduction
No Deadweight Loss

Question 21

Tax and Perfectly Elastic Demand

Answer 21

Burden will be on Sellers
Underproduction

Question 22

Tax and Perfectly InElastic Supply (quantity supplied never changes)

Answer 22

Sellers Pay
No Underproduction
No Deadweight Loss

Question 23

Perfectly Elastic Supply (price set by seller never changes)

Answer 23

Buyers pay tax
Quantity decreases
Underproduction
Deadweight Loss

Question 24

Principles of Fairness with Taxes

Answer 24

1) Benefits Principle: taxes paid equal to benefits received from the government
2) Ability to Pay Principle: Pay according to how easily they can bear the burden of tax

Question 25

Production Quota:

Answer 25

upper limit to quantity of a good that may be produced in a specified period
only has effect if BELOW equilibrium

Question 26

What is the effect on quantity with a production quota below equilibrium

Answer 26

Decrease in supply

Question 27

What is the effect on price with a production quota

Answer 27

Rise in price
There is incentive to cheat as producers can make a large profit by producing 1 more unit

Question 28

Subsidies

Answer 28

payment paid by government to producer

Question 29

What do subsidies do to production

Answer 29

Increase r/t cost decrease

Question 30

What do subsidies do to price

Answer 30

Decrease price

Question 31

If there are greater penalties on sellers for illegal goods what happens to the supply curve

Answer 31

Supply Curve shifts Left
Prices rise

Question 32

If penalities for illegal goods are greater on buyers what happens to demand curve

Answer 32

Demand curve shifts down
Price falls

Question 33

What would a tax do to price and quantity of drugs

Answer 33

Decrease Supply/ Increase Price/ Decrease Quantity bought

Question 34

How much Tax Revenue collected on a good is determined by:

Answer 34

Elasticity of Demand and Elasticity of Supply