Chapter 7 Price Ceilings, Price Floors, and Taxes

per-unit

A per-unit tax is a fixed amount collected on each unit of a product sold.

perfectly inelastic

If demand is perfectly inelastic, an increase in the price of this product has no effect on equilibrium quantity

Supply + Tax

On a graph, the line labeled Supply + Tax helps identify how much sellers will raise the price in the situation

ad valorem

an ad-valorem tax is levied as a percentage of the product's price.

market shortage

when quantity demanded exceeds quantity supplied

actual quantity

when there is a binding price ceiling, the quantity that will be exchanged is quantity supplied. Consumers can only purchase what is offered for sale (supply).

elasticities

Economic analysis is used to predict what percentage of the economic burden of the tax falls on buyers and what percentage falls on sellers. The answer depends on elasticities of demand and supply.

tax revenue

Government collects tax revenue equal to the new equilibrium quantity multiplied by the amount of tax collected on each unit.

perfectly elastic

If demand is perfectly elastic, there are perfect substitutes available, so consumers will not purchase any of the taxed item, assuming the perfect substitutes are not taxed. The seller will bear the full economic burden of the tax.

Excise taxes

Taxes are classified as either general or excise taxes. Excise taxes are levied on specific items, such as gasoline or wine, and are usually a fixed amount per unit.

economic

The economic incidence (burden) typically differs from the statutory incidence.

statutory

The statutory incidence (burden) of a tax refers to which party has the legal obligation to pay the tax.

deadweight loss

There is an efficiency loss, or excess burden of the tax, associated with commodity taxation. This efficiency loss, or deadweight loss, can be measured on a graph.

price ceiling

a maximum legal price for an output, and is sometimes referred to as a price cap. A binding price ceiling is one that is established below the equilibrium price; it prevents price from rising above the ceiling price. A price ceiling set above the equilibrium price is not binding because it does not prevent equilibrium from being attained.

price floor

a minimum legal price for an input or output, and is sometimes referred to as a price support. A binding price floor is established above the equilibrium price; it prevents the price from falling below the price floor. A price floor set below the equilibrium price is not binding because it does not prevent equilibrium from being attained.

The more inelastic side

bears the tax burden

deadweight loss

economists use this concept to measure the cost of imposing a price ceiling.

econometrics

the minimum wage is an important topic in the political arena. Supply and demand analysis demonstrates that there will likely be both winners and losers when a minimum wage is imposed, but the adverse consequences on employment opportunities and product prices can only be quantified using empirical analysis of real-world data. This kind of analysis begins with economic principles and applies mathematical and statistical tools to create a new field of study called econometrics.

The more inelastic the demand

the more buyers will bear the economic burden of a tax

The more elastic the demand

the more sellers will bear the economic burden of a tax

equilibrium

the new equilibrium occurs at the intersection of the Supply + Tax line and Demand.