Price controls And Quotas/Taxes

Question 1

What is a price control and what are examples of this?

Answer 1

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.

Question 2

What is a price floor? And where is it placed in relation the EP?

Answer 2

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.

Question 3

What is a price ceiling and where is it in location to EP?

Answer 3

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.

Question 4

What is the effect of a price ceiling on an economy? And what is an example of a price ceiling?

Answer 4

Price ceilings result in shortages where QD > QS and an example of this are rent controls.

Question 5

What is the effect of a price floor on a market and what is an example of a price floor?

Answer 5

Price floors result in excess supply where QS > QD and example of this is a minimum wage.

Question 6

What does the graph of a price ceiling look like?

Answer 6

Draw the graph

Question 7

What does the graph of a rice floor look like?

Answer 7

Draw the graph

Question 8

What is the purpose of a price ceiling?

Answer 8

To stop a price from rising above a certain level. It creates excess demand/ shortages.

Question 9

What is the purpose of a price floor?

Answer 9

It stops a price from falling below a certain level. It creates a surplus/ exceeds supply.

Question 10

Are price floors and ceilings always a good thing?

Answer 10

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.

Question 11

What are the consequences of a price ceiling?

Answer 11

• 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

Question 12

How do economists feel about rent control?

Answer 12

It’s a general consensus among economists that a ceiling on rents reduces the quality & quantity of housing.

Question 13

What are the consequences of a price floor?

Answer 13

• 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

Question 14

How do economists feels about a price floor like minimum wage?

Answer 14

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.

Question 15

How to Price ceilings and floors affect Demand and supply?

Answer 15

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.

Question 16

Something to remember about price ceilings

Answer 16

Price ceilings do not change the equilibrium price because they are merely a legal restriction while equilibrium (price & quantity) are economic conditions.

Question 17

What does a tax applied to a market do?

Answer 17

A tax essentially moves a supply curve from the consumers point of view by the amount of the tax applied to that market.

Question 18

How to governments make money off of taxes?

Answer 18

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.

Question 19

What’s the area that makes up dead weight loss?

Answer 19

It’s the area from the old equilibrium to the new equilibrium.

Question 20

How does taxation work with perfectly inelastic demand?

Answer 20

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.

Question 21

What is the relationship between Taxes and Perfectly Elastic Demand?

Answer 21

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.

Question 22

What is the purpose of a tax and what are the three types of taxes?

Answer 22

To raid revenue for the government and to discourage undesirable behaviour

1. Ad valorem tax
2. Excise tax
3. Lump-sum tax

Question 23

What is the Ad-Valorem Tax?

Answer 23

Tax owed that is a percentage of the price.

Question 24

What is the excise tax?

Answer 24

Tax depends on the QUANTITY transacted.

Question 25

What is a lump-sum tax?

Answer 25

The tax is a fixed amount (regardless of price/quantity)

Question 26

What is the influence of an excise tax?

Answer 26

The outcome of the presence of an excise tax is the same whether it is imposed on the buyer on the seller.

Question 27

What is the tax incidence burden on buyers?

Answer 27

It is the additional per unit price consumers pay cuz of the tax.

Question 28

What is the tax incidence burden on sellers?

Answer 28

Additional per unit price producers pay cuz of the tax.

Question 29

What is the relationship between who pays taxes and elasticity?

Answer 29

The more inelastic side will have a larger tax burden than the more elastic side.

Question 30

What is an example of taxes made to discourage bad behaviour?

Answer 30

Cigarette Taxes

Question 31

What is a quota?

Answer 31

A form of government regulation that limits the amount of production of a good.

Question 32

What is a quota limit?

Answer 32

The number of units that can be legally transacted.

Question 33

What is the relationship between the quota limit it’s positioning to the equilibrium quantity?

Answer 33

If the quota limit is above the equilibrium quantity then it is Non-binding because for an efficient market that quantity would not be used anyway .
Whereas if the quota limit is below the equilibrium quantity, consumer surplus goes down and producer surplus goes up in good scenarios.

Question 34

Why do governments try and implement Quotas and controls?

Answer 34

-There are consistent problems with excess supply/demand
-Governments don’t believe markets are perfectly competitive
Lessons of supply and demand might then not directly apply.
- Politically effective groups that push for policies that benefit them at the expense of others.

Question 35

What is the quota rent?

Answer 35

The difference between the demand price and the supply price at the quota limit