K,L Desc how Gov reg. and intervention affect D and S Flashcards
K. Imposition of an effective maximum price (price ceiling) by the government results in excess demand, while imposition of an effective minimum price (price floor) results in excess supply. Imposition of an effective quota reduces supply. Payment of a subsidy to producers increases supply. Imposition of a tax on suppliers reduces supply. Imposition of a tax on consumers reduces demand. L. Imposition of a price ceiling will reduce price and decrease the traded quantity to the quantity suppl
Minimum legal prices (price floors)
Min P a buyer can offer for a good, service, or resource. A price floor rests above equilibrium, so one below equilibrium has no effect on price and quantity.
Results in a surplus since Qs > Qd at floor price. Results in a DWL where Qs curve > Qd curve = right triangle
Price floor in LR: Suppliers anticipate selling the good at price floor so they increase production but do not sell all units
Consumer D for product will fall, Consumer D for substitute goods will increase.
Ex: Min wage
Maximum Legal Prices (Price Ceilings)
left triangle DWL, Shortage;excess demand; consumers now are willing to expense further in order to obtain the scarce good
A price ceiling in an upper limit on the price which a seller can charge (set usually below equilibrium). A ceiling above equil. has no effect.
Price ceilings in LR lead to:
Long lines that cost Op. Cost. of time
Discrimination by sellers as to who they sell to first
Suppliers sell at ceiling but take bribes to do so (because ceiling would be a min cost, and Demand would drive even ceilings well above)
Suppliers reduce the quality of goods
Tax on Producers
Supply curve shifts left, Q is decreased, P is increased, a shortage DWL occurs that is the loss of gains from production and trade (because a less efficient amount is produced and consumed). The DWL is half tax revenue from buyers and half tax revenue from sellers
A tax is the difference between what buyers pay and what sellers earn
S curve shifts up = statutory incidence on sellers >inc. P at all levels Q
Subsidies (payments made by governments to producers)
Causes increase in supply>decrease in price where subsidy makes up for the price lost
W/ a subsidy, the MC is > MB, where MC = supply curve, MB = demand curve = DWL; overproduction
Quotas
Production Quotas are used to regulate markets by imposing an upper limit on the Qgood that may be prod. over a specified time period.
Quotes increase market price, lowers MC of producing the quota quantity so producers love imposition of quotas (because MB>MC)
DWL to consumers and producer surplus. but producers gain overall from the quota because the increased price on Q sold by an amount greater than the producer surplus component of the DWL.
Tax on Buyers
DWL is the same. A shortgage DWL occurs, however, sellers D is shifted down as a response of the tax that initially drove P up, but Q is increased as it was with producer tax. The top portion of the DWL represents revenue from buyers and bottom is revenue from sellers.
Statutory incidence on buyers = Demand shifts down > Suppliers are forced to reduce output > Ex: sales tax: Buyer pays the entire tax (buyers tax burden)
Also, suppliers are penalized because a tax reduces Q
Important point: The actual tax incidence is independent of whether the government imposes the tax (statutory incidence) on consumers or suppliers
Tax Revenue
The amount of the tax times new equilibrium Qtax
Incidence of Tax
REvenue from buyers; taxes that buyers pay
Revenue from sellers; taxes that sellers pay
Statutory Incidence of Tax
rather, whose legally responsible to pay the tax
Actual incidence of tax
Who actually bears the cost of the tax through an increase in the price paid (buyers) or a decrease in the price recieved (sellers)
How elasticities of S and D influence the Incidence of a Tax
Demand is less elastic; demand curve is steeper; consumers bear burden
Supply is less elastic; supply is steeper; producers bear burden
The party with the more elastic curve; reacts more to changes imposed by the tax; can avoid more of the burden.
As elasticity decreases, DWL decreases
Forecast the effects of intro/removal of market interferences
on P and Q
