Government Policies Flashcards
Price ceiling
a legal maximum on the price of a good/service (ex: rent control)
Price Floor
a legal minimum on the price of a good/service
(ex: minimum wage)
Taxes
government can make buyers or sellers pay a specific amount on each unit bought/sold
What does it mean if a price ceiling is above the equilibrium market
it is not binding, has no effect on the market
Why is a price ceiling set?
protect consumers from being charged excessively high prices
why is a price floor set?
protect producers from receiving too little compensation
How does price ceiling affect market outcomes?
the market price is below the equilibrium price
quantity demanded > quantity supplied (can lead to shortages)
what can shortages lead to?
rationing, waitlists, black markets
The price ceiling is a binding constraint
the maximum price allowed by the government is lower than the equilibrium price that exists in a free market
the market price can’t rise to the level of the equilibrium price (it’s legally capped by the price ceiling)
how does price floor affect market outcomes?
a price floor below the equilibrium price isn’t binding
has no effect on the market outcome
The price floor is a binding constraint
causes a surplus (unemployment)
How does a tax effect buyers?
shifts the demand curve down to the left
creates a wedge between the price that buyers pays and the price sellers receive (amount equals
The imposition of a binding price floor on a market
causes quantity demanded to be less than quantity supplied
When a tac is placed on the seller of a product, buyers pay
more
sellers receive less than they did before the tax
When a binding price floor is imposed on a market
price no longer serves as a rationing device
