Question 1

When are price controls usually enacted?

Accepted Answer

Price controls, policies that directly control prices, are enacted when ppolicymakers believe that the market price of a good or service is unfair to buyers or sellers. However, these policies can sometimes create inequities of their own. Some examples of price control policies are rent-control laws and minimum wage laws.

Question 2

Define price ceiling.

Accepted Answer

A price ceiling is a legal maximum on the price at which a good can be sold. For example, if the government imposes a maximum price on ice cream, they are enabling a price ceiling. The opposite of a price ceiling is a price floor.

Question 3

Define price floor.

Accepted Answer

A price floor is a legal minimum on the price at which a good can be sold. For example, if the government imposes a minimum price on ice cream, they are enabling a price floor. The opposite of a price floor is a price ceiling.

Question 4

What does it mean for a price control to have a binding constraint on a market?

Accepted Answer

If a price control has a binding constraint on a market, then the price control prevents natural market forces from moving the market into equilibrium. Because price is now restricted, the market may not be able to adjust prices until it is in equilibrium. By contrast, a price control may have a non-binding effect on the economy if it does not prevent natural market forces from taking the market into equilibrium.

Question 5

What is the consequence of some of the rationing mechanisms that arise when a price ceiling induces a binding constraint on the market?

Accepted Answer

Because the price ceiling induces a binding constraint on the market, which creates a shortage of goods, sellers must ration the scarce goods among the large number of potential buyers. These rationing methods are rarely desirable. For example, long lines are inefficient because they waste buyers' time. Discrimination according to seller bias is inefficient (because goods potentially go to buyers who don't value them most highly) and unfair. Free markets, on the other hand, ration goods with prices. It is efficient and fair, and anyone who wants to buy the product can.

Question 6

Price controls, though generally motivated by a desire to help a group of people, often end up hurting that same group of people. Give three examples of this.

Accepted Answer

1. Minimum wage (price floor) – if minimum wage creates a binding constraint on the labor market, a surplus in labor will be created (in other words, a minimum wage may increase unemployment) 2. Rent-control laws (price ceiling) – though rent-control laws generally try to keep rents low and make aparments more affordable, it can also discourage landlords from maintaining their buildings and makes housing hard to find 3. If a price ceiling designed to make a certain good more affordable creates a shortage in that good (i.e. it creates a binding constraint on the market), some people may have to wait in long lines for the good while others may not get it at all

Question 7

Define tax incidence.

Accepted Answer

Tax incidence is the manner in which the burden of a tax is shared among participants in a market. This is a fundamental concept in studying the effects of taxes on markets, because it is not always clear how the burden of a tax is divided up among the various people that make an economy. For example, even though the tax may be levied on the sellers of a good, the buyers may still carry a significant burden of the tax.

Question 8

What are the basic steps for determining how a tax levied on either a buyer or a seller of a good affect market outcomes (i.e. how does a new tax law affect buyers and sellers of a good)?

Accepted Answer

We follow the same three steps that we often follow for analyzing market changes in economics: 1. Decide whether the law effects the supply curve or the demand curve. 2. Decide which way the affected curve shifts. 3. Examine how the shift affects the equilibrium price and quantity.

Chapter 6: Supply, Demand, and Government Policies Flashcards

Most of the important topics from this chapter are covered.

Brainscape's Knowledge GenomeTM

Chapter 6: Supply, Demand, and Government Policies Flashcards

Most of the important topics from this chapter are covered.

Brainscape's Knowledge Genome^TM