Econ ch 6
price ceiling
A legal maximum on the price at which a good can be sold ex: rent control laws
Price floor
A legal minimum on the price at which a good can be sold ex: minimum wage laws
A payroll tax has the effect of
A payroll tax drives a wedge in the labor market increasing the wages paid by firms and decreasing the wages received by workers.
small elasticity of supply
Sellers do not have good alternatives to producing this good
price floor (binding)
Set above the equilibrium price Surplus Some sellers are unable to sell what they want rationing mechanism: not desirable
A binding minimum wage
alters both the quantity demanded of labor and the quantity supplied of labor. increase in the quantity supplied of labor, as more workers are willing to work at the higher wage, and a decrease in the demand for labor, as firms are willing to hire fewer workers at the higher wage.
price floors (non binding)
below equilibrium price, no effect on the market
if the market price of 60-inch flat-screen TVs is $1,200 and the government imposes a price control setting the price at $1,000, this price control could be a
binding price ceiling or a nonbinding price floor.
Very elastic supply (almost horizontal) and relatively inelastic demand
buyers bear most of the burden
When a tax is placed on the buyers of hockey skates, the size of the hockey skate market
decreases, but the price paid by buyers increases.
taxes on buyers
demand curve shifts left lower equilibrium price and quantity the tax reduces the size of the market buyers that pay more are worse off
The Earned Income Tax Credit is a
method of raising living standards of the working poor without creating unemployment.
tax burden falls more heavily...
on the side of the market that is less elastic
relatively inelastic supply (almost vertical) and very elastic demand
sellers bear most of the burden
price ceiling (non binding)
set above the equilibrium price, no effect on the price or quantity sold
price ceiling (binding)
set below the equilibrium price (shortage) sellers must ration the scarce goods rationing mechanisms: long lines, discrimination according to sellers bias
taxes on sellers
supply curve shifts left higher equilibrium price lower equilibrium quantity the tax reduces the size of the market sellers that receive less are worse off
if a binding price floor is imposed on the market for carrots, then
surplus of carrots
If the government removes a binding price ceiling in the market for gasoline, then
the price of gasoline will increase, and the quantity of gasoline sold will increase. If the government removes a binding price ceiling, the higher market price and quantity will prevail.
If the equilibrium wage exceeds the minimum wage, then
there will be no unemployment
When policymakers impose a luxury tax on buyers of a good,
they are not successful in redistributing income from the rich to the poor.
small elasticity of demand
Buyers do not have good alternatives to consuming this good
Consider the market for electricity. Buyers
Buyers would prefer a price ceiling because, if it were binding, it would result in a price lower than the market price. Sellers would prefer a price floor because, if it were binding, it would result in a price higher than the market price.
