Price controls And Quotas/Taxes Flashcards
What is a price control and what are examples of this?
A price control is a legal restriction placed on the market by the government to either establish a minimum or a maximum price for something. It exists in the form of price ceilings or price floors.
What is a price floor? And where is it placed in relation the EP?
A price floor is the lowest legal price that can be paid in a market for goods/services/labour or financial capital and it is above the equilibrium price. An example of this is minimum wage.
What is a price ceiling and where is it in location to EP?
A price ceiling is a legal restriction on the maximum price a firm can charge for its good/ services and it is usually below the EP.
What is the effect of a price ceiling on an economy? And what is an example of a price ceiling?
Price ceilings result in shortages where QD > QS and an example of this are rent controls.
What is the effect of a price floor on a market and what is an example of a price floor?
Price floors result in excess supply where QS > QD and example of this is a minimum wage.
What does the graph of a price ceiling look like?
Draw the graph
What does the graph of a rice floor look like?
Draw the graph
What is the purpose of a price ceiling?
To stop a price from rising above a certain level. It creates excess demand/ shortages.
What is the purpose of a price floor?
It stops a price from falling below a certain level. It creates a surplus/ exceeds supply.
Are price floors and ceilings always a good thing?
No, they have consequences that transfer surpluses and are inefficient. And both of them block some transactions from happening, which is why there is some deadweight loss created.
What are the consequences of a price ceiling?
- Shortages occur: Excess Demand
- sellers of the product (cuz their surplus reduces)
- those who are WTP but can’t purchase the product suffer: Inefficient Allocation
- Costing People time, money and effort to try and get the few of the product that is available: Wasted Resources
- reduced incentive for suppliers to provide high quality products: Inefficient low quality
- People will buy it for low prices then sell it illegally at ridiculously high prices: Black market
How do economists feel about rent control?
It’s a general consensus among economists that a ceiling on rents reduces the quality & quantity of housing.
What are the consequences of a price floor?
- Consumers demand fewer units: Excess supply
- Firms with high costs may be able to survive in markets with price floors: a Inefficient allocation of sales to suppliers
- Costing time, money and effort to find a buyer, so hints may have to hit up excess supply: Wasted resources
- less incentive to provide “low-end” products to markets: Inefficient high quality
- If minimum wage is too high there could be incentives to pay workers “under the table” as not to be an official employee: Inefficient high quality
How do economists feels about a price floor like minimum wage?
There is a mixed opinion amongst economists but one opinion is that with higher minimum wages, It may be better for employers to pay more cuz it improves the quality of labour and reduces turnover.
How to Price ceilings and floors affect Demand and supply?
They don’t affect Demand and supply, They can cause a different choice of QD or of QS and movement ALONG the curve but never move the curve.
Something to remember about price ceilings
Price ceilings do not change the equilibrium price because they are merely a legal restriction while equilibrium (price & quantity) are economic conditions.
What does a tax applied to a market do?
A tax essentially moves a supply curve from the consumers point of view by the amount of the tax applied to that market.
How to governments make money off of taxes?
They make money from the tax revenue that becomes government revenue and it is the area between the producer Surplus and the consumer surplus. It doesn’t eliminate them, it just takes some of each to create the government revenue.
What’s the area that makes up dead weight loss?
It’s the area from the old equilibrium to the new equilibrium.
How does taxation work with perfectly inelastic demand?
All government revenue will then come from consumer surplus and quantity will remain the same. There is no deadweight loss which means there is no lost surplus just a transfer of surplus.
What is the relationship between Taxes and Perfectly Elastic Demand?
The tax revenue again comes out of the producer surplus and with perfectly elastic demand there’s no consumer surplus because the amount that their willing to pay is the exact amount that it will cost. Therefore there is no consumer surplus and producer surplus will decrease to help create government revenue.
What is the purpose of a tax and what are the three types of taxes?
To raid revenue for the government and to discourage undesirable behaviour
- Ad valorem tax
- Excise tax
- Lump-sum tax
What is the Ad-Valorem Tax?
Tax owed that is a percentage of the price.
What is the excise tax?
Tax depends on the QUANTITY transacted.
