Government Policies and Market Efficiency Flashcards
What does it mean for a price control to be binding?
It is made to be legally required
What is a binding price floor?
A legal minimum that lies ABOVE the market equilibrium price
What is a binding price ceiling?
A legal maximum that lies BELOW the market equilibrium price
Taxes create a ____ between the price the buyer ____ and the price the seller ____
Wedge, pays, receives
What makes a price ceiling inefficient?
It causes a shortage
What makes a price floor inefficient?
It causes a surplus
Does a tax make a buyer worse off? Or is a seller more worse off?
Taxes makes both worse off, they both share the burden because buyers have to pay MORE and sellers recieve LESS revenue
The greater burden of the tax is borne by those ___ sensitive to price changes. Explain.
Less, or more inelastic. This is because the buyer/seller won’t care as much if the price changes. They’ll accept the tax regardless. (think of the cigarette and ice cream example)
What happens when supply is more elastic than demand when both are taxed? Who bears the burden of the tax more?
The buyer bears the burden more because the demand is more INELASTIC than the supply.
What happens when demand is more elastic than supply when both are taxed? Who bears the burden of the tax more?
The seller bears the burden more because the supply is more INELASTIC than the demand.
The more elastic the Demand, the _____ the burden.
Smaller (think of ice cream example)
The more elastic the Supply, the ____ the burden.
Smaller
Where is the Consumer surplus on a graph?
Above the equilibrium price
Where is the Producer surplus on a graph?
Below the equilibrium price
