Ch. 6 Flashcards
(9 cards)
When are price control policies enacted?
When policymakers believe that the market price of a good or service is unfair to buyers or sellers.
What is a price ceiling?
A legal maximum on the price at which a good can be sold
What is a price floor
A legal minimum on the price at which a good can be sold
What happens when a price ceiling is above the equilibrium of supply and demand?
No effect
What happens when a price ceiling is below the equilibrium of supply and demand?
When the government imposes a binding price ceiling on a competitive market, a shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers.
What happens when a price floor is above the equilibrium of supply and demand?
A binding price floor causes a surplus.
What is tax incidence?
The manner in which the burden of a tax is shared among participants in a market.
How does a tax on sellers affect market outcomes?
- Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium.
- Buyers and sellers share the burden of taxes. In the new equilibrium, buyers pay more for the good, and sellers receive less.
How is the burden of a tax divided?
It falls more heavily on the side of the market that is less elastic.
