Price controls and taxes Flashcards
(41 cards)
What are price controls?
Government-imposed limits on how high or low a price can be in the market to protect buyers or sellers.
Why do governments implement price controls?
Because buyers or sellers believe the market price is unfair and lobby for intervention.
What is a price ceiling?
A legal maximum price at which a good or service can be sold.
What is a price floor?
A legal minimum price below which a good or service cannot be sold.
What happens when a price ceiling is binding?
It causes a shortage because the price is below equilibrium, increasing quantity demanded and decreasing supply.
What happens when a price floor is binding?
It causes a surplus because the price is above equilibrium, increasing quantity supplied and decreasing demand.
What does it mean if a price floor or ceiling is not binding?
It has no effect because the market price naturally stays within the allowed range.
What is tax incidence?
It refers to how the burden of a tax is shared between buyers and sellers.
What determines who bears the greater burden of a tax?
The relative elasticity of supply and demand; the side that is more inelastic bears more burden.
What effect do taxes have on market activity?
They discourage market activity, decrease quantity sold, buyers pay more, sellers receive less.
Who legally pays the tax—does it matter?
No; whether buyers or sellers are taxed, the economic burden is shared, and the market outcome is the same.
What happens to equilibrium when a tax is imposed?
Equilibrium quantity falls, price paid by buyers rises, and price received by sellers falls.
What are the two key lessons from tax analysis?
- Taxes discourage market activity. 2. Buyers and sellers share the burden, regardless of who pays the tax directly.
What is an example of a price ceiling?
Rent control—limits the rent landlords can charge tenants.
What is an example of a price floor?
Minimum wage—sets the lowest legal wage employers can pay workers.
What is the outcome when equilibrium price is above a price floor?
The price floor is not binding and has no effect.
What is the outcome when equilibrium price is below a price floor?
The price floor is binding and leads to a surplus.
What is the outcome when equilibrium price is below a price ceiling?
The price ceiling is binding and causes a shortage.
What is the outcome when equilibrium price is above a price ceiling?
The price ceiling is not binding and has no effect.
What are rationing mechanisms?
Non-price methods of allocating goods during shortages or surpluses, like long lines or favoritism.
What is a common problem with price controls?
They can lead to inefficient allocations of resources and undesirable rationing mechanisms.
What is the goal of government price controls?
To make markets fairer or more affordable, especially for essentials.
Who are the typical beneficiaries of price ceilings?
Buyers, especially low-income consumers.
