ECON 2813 CH6
Tax incidence - determining how the tax burden is shared between producers and consumers
A tax on a good places a wedge between the price paid by buyers and the price received by sellers. When the market moves to the new equilibrium, buyers pay more for the good and sellers receive less for it. In this sense, buyers and sellers share the tax burden. The incidence of a tax (that is, the division of the tax burden) does not depend on whether the tax is levied on buyers or sellers. The incidence of a tax depends on the price elasticities of supply and demand. Most of the burden falls on the side of the market that is less elastic because that side of the market can respond less easily to the tax by changing the quantity bought or sold.
Price ceiling - definition and example of; when is it binding? What is the economic result?
Price ceiling: a legal maximum on the price of a good or service Example: rent control A price ceiling above the eq'm price is not binding - has no effect on the market outcome. The eq'm price ($800) is above the ceiling and therefore illegal. A price ceiling is a legal maximum on the price of a good or service. An example is rent control. If the price ceiling is below the equilibrium price, so the price ceiling is binding, the quantity demanded exceeds the quantity supplied. Because of the resulting shortage, sellers must in some way ration the good or service among buyers.
Price floor - definition and example of; when is it binding? What is the economic result?
Price floor: a legal minimum on the price of a good or service Example: minimum wage The ceiling is a binding constraint on the price, causes a shortage. A price floor below the eq'm price is not binding - has no effect on the market outcome The eq'm wage ($4) is below the floor and therefore illegal. The floor is a binding constraint on the wage, causes a surplus (i.e., unemployment). A price floor is a legal minimum on the price of a good or service. An example is the minimum wage. If the price floor is above the equilibrium price, so the price floor is binding, the quantity supplied exceeds the quantity demanded. Because of the resulting surplus, buyers' demands for the good or service must be rationed in some way among sellers.
Why would a government want to impose a price ceilings or price floor?
When the government levies a tax on a good, the equilibrium quantity of the good falls; that is, a tax on a market shrinks the size of the market. The govt levies taxes on many goods & services to raise revenue to pay for national defense, public schools, etc.
