Government Actions in markets Flashcards
What is the price ceiling?
maximum price one can charge
A price ceiling set above the equilibrium price has no effect in that sense is non-binding. But a price ceiling set below the equilibrium price is binding.
What does a binding rent ceiling set below the equilibrium rent create?
A housing shortage
Increased search activity
A black market
What is search activity?
The time spent looking for someone with whom to do business
What is a black market?
An illegal market in which the equilibrium price exceeds the price ceiling.
What is a price floor?
a minimum price one has to pay.
a) Minimum wage
b) Agricultural price
Support price floor below equilibrium price does not affect the market outcome and is non-binding.
What is a tax wedge?
a wedge between the price consumers pay (PC) and the price sellers get (PS).
t =PC–PS
What is a tax incidence?
If demand is more inelastic (or supply is more elastic), a higher burden of the tax falls on consumers.
If demand is perfectly inelastic, all burden falls on consumers.
