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ECO1017 > Government policy > Flashcards

Government policy Flashcards

1
Q

Define price ceiling

A

A legal maximum on the price at which a good can be sold

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2
Q

Define price floor

A

A legal minimum on the price at which a good can be sold

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3
Q

What does a binding price ceiling lead to?

A

It leads to a fall in supply and creates shortages

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4
Q

Why does a binding price ceiling lead to a fall in supply and shortages?

A

Because quantity demanded is more than quantity supplied

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5
Q

What happens to the people that demand the goods when there is a price ceiling?

A

Some people get the goods at lower prices but some do not get them at all

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6
Q

What happens to the sellers when there is a price ceiling?

A

They must ration the goods among the large number of potential buyers

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7
Q

What is one major problem with a price ceiling?

A

A black market can occur

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8
Q

How can you find the shortage as a result of a price ceiling on a graph?

A

It is the gap between the price ceiling intersects the supply curve and the demand curve, the gap occurs under the curves

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9
Q

What are rent controls?

A

These are ceilings placed on the rents that the landlords may charge their tenants

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10
Q

What is the goal of rent control policy?

A

To help the poor by making housing more affordable

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11
Q

What are the negative impacts of rent control policy?

A

Fall in supply
Worse-maintained housing
Choosier landlords

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12
Q

What happens to the elasticity of the short run supply and demand curve for rent control?

A

Supply and demand are price inelastic

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13
Q

What does a short run supply and demand curve look like for rent control?

A

The supply curve is vertical, the demand curve follows the law of demand and there is a shortage

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14
Q

What happens to the elasticity of the long run supply and demand curve for rent control?

A

Supply and demand are price elastic

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15
Q

What does a long run supply and demand curve look like for rent control?

A

Both curves follow their respective laws however, they aren’t steep and as a result the shortage is even greater

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16
Q

How can you find the surplus on a graph as a result of a price floor?

A

It is the gap between the places that the price floor intersects the supply and demand curves, it is above the curves

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17
Q

What does a binding price floor create?

A

A surplus

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18
Q

Why does a binding price floor create a surplus?

A

Quantity supplied is more than quantity demanded

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19
Q

What happens to the sellers as a result of the price floor?

A

Some sellers can sell the goods at a higher price but some are not able to sell at all and have to exit the market

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20
Q

What happens to the buyers as a result of a price floor?

A

Some buyers have to pay an unfairly high price

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21
Q

Why is there a price floor for alcohol?

A

To encourage less drinking and drinking responsibly

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22
Q

What is a positive of putting a price floor in place for the minimum wage (increasing it)?

A

Most low-wage workers would receive higher pay

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23
Q

What is a disadvantage of increasing the minimum wage?

A

Some jobs could become eliminated and as a result, the income of workers who lose their jobs would fall substantially and the unemployment rate would rise

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24
Q

Why would increasing the minimum wage cause job losses?

A

Because the firms can’t afford to keep all of the staff

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25
Q

What is the aim of the carbon price floor?

A

To encourage the transition to a low carbon economy

26
Q

How does the carbon price floor work?

A

Companies need to pay for their pollution at a price based on the carbon price floor, this is the minimum price of the right to pollute

27
Q

What is important for the implementation of carbon price floors?

A

It is important that they are introduced gradually

28
Q

What are two reasons why governments raise taxes?

A

To help pay for the various services that the government provides
To influence the behaviour and achieve market outcomes that are deemed desirable

29
Q

What are 3 costs of taxes to tax payers?

A

The tax payment itself
Deadweight losses
Administrative burdens

30
Q

Define a specific tax

A

A fixed rate tax levied on goods and services expressed a sum per unit

31
Q

Define deadweight loss

A

A fall in total surplus from a market distortion, such as tax

32
Q

What does a tax on sellers place a wedge between?

A

It places a wedge between the price buyers pay and the price sellers receive

33
Q

What does a tax levied on sellers increase?

A

It increases a constant cost of every unit sold

34
Q

What happens to the supply curve as a result of tax?

A

It shifts up by the amount of the tax

35
Q

What happens to the quantity sold as a result of tax?

A

The quantity sold decreases

36
Q

If a tax is levied on sellers, who takes the burden of the tax?

A

Both buyers and sellers because buyers pay more for the good and sellers receive less

37
Q

What happens to the equilibrium quantity as a result of a tax?

A

It shifts upwards because the supply curve has shifted upwards

38
Q

What is the equation for tax revenue?

A

T x Q
T = the size (amount) of the tax
Q = the quantity of the good sold

39
Q

How do you find the size of the tax?

A

Subtract the price buyers pay from the price sellers receive, this can be found from the point at which the new and old supply curves cross the new equilibrium line

40
Q

How can the proportion of tax burden for buyers and sellers be found on a demand and supply curve?

A

Anything above the initial equilibrium is the consumer burden and anything below the initial equilibrium is the producer burden

41
Q

What does tax incidence refer to?

A

The manner in which the burden of a tax is shared among participants in a market

42
Q

On which side of the market does the tax burden tend to fall more heavily?

A

The tax burden falls more heavily on the side of the market that is less price elastic

43
Q

What does a low price elasticity of demand mean?

A

Buyers do not have good alternatives to consume the product (nothing better available)

44
Q

What does a low price elasticity of supply mean?

A

Sellers do not have good alternatives to produce this good

45
Q

What happens to the incidence of the tax when supply is more price elastic than demand?

A

The incidence of the tax falls more heavily on the consumer

46
Q

What happens to the demand curve when the tax burden falls more heavily on the consumer?

A

It becomes steeper

47
Q

What happens to the incidence of the tax when supply is less price elastic than the demand?

A

The incidence of the tax falls more heavily on the producer

48
Q

What happens to the supply curve when the tax burden falls more heavily on the producer?

A

The supply curve gets steeper

49
Q

What does tax on a good do to consumer surplus and producer surplus?

A

It reduces consumer surplus and producer surplus, causing a deadweight loss

50
Q

Why does a tax cause a deadweight loss?

A

The fall in producer and consumer surplus exceeds tax revenue

51
Q

Why do taxes impose deadweight losses?

A

When a tax raises the price for buyers and reduces the price for sellers, it gives buyers an incentive to consume less and producers an incentive to produce less, causing the size of the market to shrink below its optimum

52
Q

Why do taxes cause markets to be inefficient?

A

Because they cause deadweight losses and distort market incentives

53
Q

How can you find the deadweight loss?

A

It is the triangle next to the tax revenue rectangle

54
Q

What 3 changes occur as a result of tax?

A

A change in consumer surplus
A change in producer surplus
A change in tax revenue

55
Q

What determines whether the deadweight loss from a tax is large or small?

A

It depends on how much the quantity supplied and quantity demanded responds to price which depends on the price elasticities of supply and demand

56
Q

What happens to the deadweight loss if the supply is price inelastic?

A

It is small

57
Q

What happens to the deadweight loss if the supply is price elastic?

A

It is large

58
Q

What happens to the deadweight loss if the demand is price inelastic?

A

It is small

59
Q

What happens to the deadweight loss if the demand is price elastic?

A

It is large

60
Q

Finish this sentence: the greater the price elasticities of demand and supply…

A

The larger the decline in equilibrium quantity and the greater the deadweight loss of a tax

ECO1017 (16 decks)

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