chp 6 Gov. Policies

Question 1

Price Controls

Answer 1

Price Ceiling, Price flooring

Question 2

Price Ceiling

Answer 2

if gov thinks eq. is too HIGH a legal maximum is put on the price that can be charged for the good
New price has to be lower than eq. price for it to be binding effective
ex. gov put a rent freeze where they lowered the amount of $ landlords can charge to make housing more affordable
LEADS TO SHORTAGES, WASTED RESOURCES, BLACK MARKETS, LOW QUALITY BUYERS, INEFFICIENT ALLOCATIONS AND DWL IN TOTAL SURPLUS

Question 3

Price Floor

Answer 3

If gov thinks market eq is too LOW a legal min is put on the price that can be charged for that good
New price has to be higher than eq. price for it to be binding effective
ex.gov put price freeze for what wheat farmers can receive to ensure they make a certain amount of $
LEADS TO EXCESS SUPPLY, WASTE, HIGH QUALITY, INEFFICIENT ALLOCATIONS and DWL in TS

Question 4

Sales Tax

Answer 4

Gov collects sale taxes as revenue towards funding of public goods

Question 5

Tax on Suppliers

Answer 5

gov wants to recieve tax (t) on every unit sold regardless of the goods current selling price
Eq. price is now higher and quantity traded lower
Higher cost of production
Consumer pays new eq price (Pc)
Firm collects Pc and takes out t for gov
FIRM IS LEFT WITH A PRICE OF Pf= Pc-t
S CURVE SHIFTS LEFT BY AMOUNT OF TAX

Question 6

Tax on Consumers

Answer 6

This raises price paid by consumers
DCURVE SHIFTS DOWN BY AMOUNT OF TAX
eq. price and quantity traded is lower
CONSUMER PAYS Pc=Pf+t

Question 7

Burden of Tax

Answer 7

Whichever curve is steeper = inelastic= larger burden of tax

Question 8

DWL of taxation

Answer 8

Taxes reduce quantity traders in market compared to the non-tax eq. quantity

Question 9

Determinants of DWL due to tax

Answer 9

1. Price elasticities of supply and demand

2. Size of the tax