Government policy Flashcards
Define price ceiling
A legal maximum on the price at which a good can be sold
Define price floor
A legal minimum on the price at which a good can be sold
What does a binding price ceiling lead to?
It leads to a fall in supply and creates shortages
Why does a binding price ceiling lead to a fall in supply and shortages?
Because quantity demanded is more than quantity supplied
What happens to the people that demand the goods when there is a price ceiling?
Some people get the goods at lower prices but some do not get them at all
What happens to the sellers when there is a price ceiling?
They must ration the goods among the large number of potential buyers
What is one major problem with a price ceiling?
A black market can occur
How can you find the shortage as a result of a price ceiling on a graph?
It is the gap between the price ceiling intersects the supply curve and the demand curve, the gap occurs under the curves
What are rent controls?
These are ceilings placed on the rents that the landlords may charge their tenants
What is the goal of rent control policy?
To help the poor by making housing more affordable
What are the negative impacts of rent control policy?
Fall in supply
Worse-maintained housing
Choosier landlords
What happens to the elasticity of the short run supply and demand curve for rent control?
Supply and demand are price inelastic
What does a short run supply and demand curve look like for rent control?
The supply curve is vertical, the demand curve follows the law of demand and there is a shortage
What happens to the elasticity of the long run supply and demand curve for rent control?
Supply and demand are price elastic
What does a long run supply and demand curve look like for rent control?
Both curves follow their respective laws however, they aren’t steep and as a result the shortage is even greater
How can you find the surplus on a graph as a result of a price floor?
It is the gap between the places that the price floor intersects the supply and demand curves, it is above the curves
What does a binding price floor create?
A surplus
Why does a binding price floor create a surplus?
Quantity supplied is more than quantity demanded
What happens to the sellers as a result of the price floor?
Some sellers can sell the goods at a higher price but some are not able to sell at all and have to exit the market
What happens to the buyers as a result of a price floor?
Some buyers have to pay an unfairly high price
Why is there a price floor for alcohol?
To encourage less drinking and drinking responsibly
What is a positive of putting a price floor in place for the minimum wage (increasing it)?
Most low-wage workers would receive higher pay
What is a disadvantage of increasing the minimum wage?
Some jobs could become eliminated and as a result, the income of workers who lose their jobs would fall substantially and the unemployment rate would rise
Why would increasing the minimum wage cause job losses?
Because the firms can’t afford to keep all of the staff
What is the aim of the carbon price floor?
To encourage the transition to a low carbon economy
How does the carbon price floor work?
Companies need to pay for their pollution at a price based on the carbon price floor, this is the minimum price of the right to pollute
What is important for the implementation of carbon price floors?
It is important that they are introduced gradually
What are two reasons why governments raise taxes?
To help pay for the various services that the government provides
To influence the behaviour and achieve market outcomes that are deemed desirable
What are 3 costs of taxes to tax payers?
The tax payment itself
Deadweight losses
Administrative burdens
Define a specific tax
A fixed rate tax levied on goods and services expressed a sum per unit
Define deadweight loss
A fall in total surplus from a market distortion, such as tax
What does a tax on sellers place a wedge between?
It places a wedge between the price buyers pay and the price sellers receive
What does a tax levied on sellers increase?
It increases a constant cost of every unit sold
What happens to the supply curve as a result of tax?
It shifts up by the amount of the tax
What happens to the quantity sold as a result of tax?
The quantity sold decreases
If a tax is levied on sellers, who takes the burden of the tax?
Both buyers and sellers because buyers pay more for the good and sellers receive less
What happens to the equilibrium quantity as a result of a tax?
It shifts upwards because the supply curve has shifted upwards
What is the equation for tax revenue?
T x Q
T = the size (amount) of the tax
Q = the quantity of the good sold
How do you find the size of the tax?
Subtract the price buyers pay from the price sellers receive, this can be found from the point at which the new and old supply curves cross the new equilibrium line
How can the proportion of tax burden for buyers and sellers be found on a demand and supply curve?
Anything above the initial equilibrium is the consumer burden and anything below the initial equilibrium is the producer burden
What does tax incidence refer to?
The manner in which the burden of a tax is shared among participants in a market
On which side of the market does the tax burden tend to fall more heavily?
The tax burden falls more heavily on the side of the market that is less price elastic
What does a low price elasticity of demand mean?
Buyers do not have good alternatives to consume the product (nothing better available)
What does a low price elasticity of supply mean?
Sellers do not have good alternatives to produce this good
What happens to the incidence of the tax when supply is more price elastic than demand?
The incidence of the tax falls more heavily on the consumer
What happens to the demand curve when the tax burden falls more heavily on the consumer?
It becomes steeper
What happens to the incidence of the tax when supply is less price elastic than the demand?
The incidence of the tax falls more heavily on the producer
What happens to the supply curve when the tax burden falls more heavily on the producer?
The supply curve gets steeper
What does tax on a good do to consumer surplus and producer surplus?
It reduces consumer surplus and producer surplus, causing a deadweight loss
Why does a tax cause a deadweight loss?
The fall in producer and consumer surplus exceeds tax revenue
Why do taxes impose deadweight losses?
When a tax raises the price for buyers and reduces the price for sellers, it gives buyers an incentive to consume less and producers an incentive to produce less, causing the size of the market to shrink below its optimum
Why do taxes cause markets to be inefficient?
Because they cause deadweight losses and distort market incentives
How can you find the deadweight loss?
It is the triangle next to the tax revenue rectangle
What 3 changes occur as a result of tax?
A change in consumer surplus
A change in producer surplus
A change in tax revenue
What determines whether the deadweight loss from a tax is large or small?
It depends on how much the quantity supplied and quantity demanded responds to price which depends on the price elasticities of supply and demand
What happens to the deadweight loss if the supply is price inelastic?
It is small
What happens to the deadweight loss if the supply is price elastic?
It is large
What happens to the deadweight loss if the demand is price inelastic?
It is small
What happens to the deadweight loss if the demand is price elastic?
It is large
Finish this sentence: the greater the price elasticities of demand and supply…
The larger the decline in equilibrium quantity and the greater the deadweight loss of a tax
