Chapter 7: Price Control and Taxes

Question 1

What is a price control?

Answer 1

A legal restriction on how low or high the price can be for a good or service.

Question 2

What is a price ceiling?

Answer 2

A maximum price that sellers can charge for a good or service.

Question 3

What is the difference between a binding and non-binding price ceiling?

Answer 3

Non-binding: Set above or equal to equilibrium price; has no effect on price or quantity.
Binding: Set below equilibrium price; creates a shortage as demand exceeds supply.

Question 4

What are the effects of a binding price ceiling?

Answer 4

1. Shortages.
2. Wasteful line-ups and search costs.
3. Inefficient allocation of resources.
4. Missed gains from trade.
5. Reduction in product quality.

Question 5

What is a common example of a price ceiling?

Answer 5

Rent control, which aims to make housing more affordable but can lead to shortages.

Question 6

What is a price floor?

Answer 6

A minimum price that sellers can charge for a good or service.

Question 7

what is the difference between a binding and non-binding price floor?

Answer 7

Non-binding: Set below or equal to equilibrium price; has no effect on price or quantity.
Binding: Set above equilibrium price; creates a surplus as supply exceeds demand.

Question 8

What are the effects of a binding price floor?

Answer 8

1. Surpluses.
2. Missed gains from trade.
3. Wasteful search costs.
4. Misallocation of resources.
5. Potential black markets for goods/services.

Question 9

How can binding price ceilings and floors lead to discrimination?

Answer 9

In a shortage or surplus situation, sellers can discriminate against certain groups since they have more buyers or sellers than available goods/services.

Question 10

What is deadweight loss?

Answer 10

The loss of economic efficiency when the equilibrium outcome is not achievable due to price controls, leading to missed trades.

Question 11

What common pitfall should be avoided when drawing price controls?

Answer 11

Drawing a binding price ceiling above equilibrium or a binding price floor below equilibrium; both will have no effect on the market.

Question 12

What is the purpose of taxes in society?

Answer 12

Taxes are essential for funding government services such as roads, schools, and police.

Question 13

What is a unit tax?

Answer 13

unit tax is a specific dollar amount imposed on each unit sold, rather than a percentage of the price.

Question 14

What happens to demand when a tax is imposed on buyers?

Answer 14

Demand decreases, shifting the demand curve to the left.

Question 15

In the pie tax example, what was the pre-tax equilibrium price and quantity?

Answer 15

The pre-tax equilibrium price was $12.00, and the quantity was 800.

Question 16

What was the post-tax equilibrium price and quantity in the pie example?

Answer 16

The post-tax equilibrium price for sellers was $11.00, buyers paid $12.50, and the quantity decreased to 700.

Question 17

How do taxes affect market activity?

Answer 17

Taxes discourage market activity by lowering the quantity bought and sold.

Question 18

What occurs when a tax is imposed on sellers?

Answer 18

Supply decreases, shifting the supply curve to the left.

Question 19

What determines the actual burden of a tax?

Answer 19

The burden of a tax depends on the elasticity of supply and demand, not who is taxed.

Question 20

When do buyers bear more of the tax burden?

Answer 20

When supply is elastic and demand is inelastic.

Question 21

When do sellers bear more of the tax burden?

Answer 21

When supply is inelastic and demand is elastic.

Question 22

What is the key takeaway regarding tax incidence?

Answer 22

The side of the market that is more inelastic pays a larger portion of the tax.

Question 23

What can government policies like taxes do to markets?

Answer 23

They can distort markets, affecting supply and demand.

Question 24

Why is it important to understand the implications of taxes?

Answer 24

It helps in evaluating their effectiveness and the potential market distortions they cause.