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How are product and resources markets linked? What are the consequences of this?

Resource markets and product markets are closely linked. A change in one will generally result in changes in the other.


What is a price control?

Government-mandated prices that are generally imposed in the form of maximum or minimum legal prices.


What are the impacts of rent controls?

Rent controls, for example, will lead to shortages, less investment, poor maintenance, and deterioration in the quality of rental housing.


What is a price floor? What are the consequences of price floors?

A legally established minimum price buyers must pay for a good or resource.


What are the impacts of the minimum wage?

Legislation requiring that workers be paid at least the stated minimum hourly rate of pay.


What are black markets?

A market that operates outside the legal system in which either illegal goods are sold, or legal goods are sold at illegal prices or terms.


What is deadweight loss? How is it calculated and why do deadweight losses occur?

The loss of gains from trade to buyers and sellers that occurs when a tax is imposed.


Does it matter who a tax is levied on?

No, the burden is on both buyers and sellers over and above the actual payment of the tax.


How is elasticity related to tax incidence

When demand is relatively inelastic and supply is relatively elastic, buyers will bear the larger share of the tax burden.

When demand is relatively elastic, or supply is relatively inelastic, sellers will bear the larger share of the tax burden.


How is elasticity related deadweight loss?

The excess burden of a tax system will therefore be lower if taxes are levied on goods and services for which either demand or supply is highly inelastic.


What is the difference between average and marginal tax rates?

The additional tax liability a person faces divided by his or her additional taxable income.


What is the Laffer curve and what does it tell us?

A curve illustrating the relationship between the tax rate and tax revenues. Tax revenues will be low at both very high and very low tax rates. When tax rates are quite high, lowering them can increase tax revenue.


What is a subsidy?

A payment the government makes to either the buyer or the seller, usually on a per-unit basis, when a good or service is purchased or sold.


How does elasticity determine who ultimately receives the subsidy?

The greater share of the benefit of a subsidy will always be shifted toward the more inelastic side of the market. Thus, the more inelastic the supply, the larger the share of the benefit that will accrue to sellers.