Ch. 6 - Taxes, Price Controls, & Quantity Regulations

Question 1

Which way does a tax on buyers shift the demand curve? By how much?

Which way does a tax on suppliers shift the supply curve? By how much?

Answer 1

• A tax on buyers shifts the demand curve down/left by the tax amount
• A tax on sellers shifts the supply curve up/right by the amount of increase in marginal benefit

Question 2

What is a Statutory Burden? What is an Economic Burden?

Answer 2

Statutory Burden - The burden of being assigned by the government to send a tax payment

Economic Burden - The burden created by the change in after-tax prices faced by buyers & sellers

Question 3

What is Tax Incidence?

Answer 3

The division of the economic burden of a tax between buyers & sellers

• It doesn’t matter whether the buyer or seller pays the tax, because a change in the statutory burden doesn’t affect the economic burden they each face
• Tax incidence depends on the price elasticity of demand & supply

Question 4

What is a Subsidy?

Answer 4

A payment made by the government to those who make a specific choice

• The government does this to try and encourage the consumption of certain goods & services
• When demand is more elastic relative to supply, buyers capture less of a subsidy
• When supply is more elastic relative to demand, sellers capture less of a subsidy
• Just like with taxes, it doesn’t matter who gets the subsidy

Question 5

What is a Price Ceiling? What is a Price Floor?

Answer 5

Price Ceiling - A maximum price that sellers can change

Price Floor - A minimum price that sellers chan charge

Question 6

What is a Binding Price Ceiling? What is a Binding Price Floor?

Answer 6

Binding Price Ceiling - A price ceiling that prevents the market from reaching the market equilibrium

• Price ceilings lower prices but cause shortages

Binding Price Floor - A price floor that prevents the market from reaching the market equilibrium

• Price floors raise prices but cause surpluses

Question 7

What is Quantity Regulation? Mandate? Quotas?

Answer 7

Quantity Regulation - A minimum or maximum quantity that can be sold

Mandate - Requirement to buy or sell a minimum amount of goods

Quotas - A limit on the maximum quantity of a good that can be sold