02 & 04 October 2017

The legal maximum on the price at which a good/service can be sold.

Economics Principles II

Professor Andrew Paizis

Week 4 Notes

Questions to answer

⮚ What are price ceilings and price floors?

o What are some examples of each?

⮚ How do price ceilings and price floors affect market outcomes? ⮚ How do taxes affect market outcomes?

o How do the effects depend on whether the tax is imposed  on buyers or sellers?

⮚ What is the incidence of a tax?

o What determines the incidence?

Key Terms

⮚ Price ceiling

⮚ Price floor

⮚ Taxes  

⮚ Tax incidence

What is the incidence of a tax?

Chapter 6: Supply, Demand, and Government Policies

• Government policies that alter the private market outcome

o Price ceiling If you want to learn more check out A power source that provides power with a constant voltage, is what?

▪ Definition: the legal maximum on the price at which a good/service can be  sold

▪ e.g. rent-control laws

▪ How price ceilings affect market outcomes

• When  a  price  ceiling  is above  the  equilibrium  price,  there  is  no  

market outcome

• When a price ceiling is below the equilibrium price, there will be a  

shortage of supply

o The more price-elastic demand for a good is, the larger the  

shortage will be in the long run

Governments can make buyers or sellers pay a specific amount for each unit, is what?

Don't forget about the age old question of Who is the author of the jay treaty?

o Sellers  ration  goods  ???? long  lines,  inefficient,  and  unfair  

distribution of resources

o Price floor

▪ Definition: the legal minimum on the price at which a good/service can be  sold

▪ e.g. minimum wage laws

▪ How price floors affect market outcomes

• When  a  price  floor is  below  the  equilibrium  price,  there  is  no  

market outcome

02 & 04 October 2017

Economics Principles II

Professor Andrew Paizis

Week 4 Notes

• When a price floor is above the equilibrium outcome, there will be  a surplus of supply

o Taxes: governments can make buyers or sellers pay a specific amount on each unit • Evaluating price controls Don't forget about the age old question of What is harlow’s experiments of attachment?

o Markets are usually good ways to organize economic activity

▪ Economists usually oppose price ceilings and price floors

▪ Prices are not the outcome of some haphazard process

▪ Prices have the crucial job of balancing supply and demand

o Governments can sometimes improve market outcomes

▪ e.g. price controls thought to remedy unfair market outcomes. which are  aimed at helping the poor

▪ However, this intervention often hurts those intended to help

▪ Other ways of helping those in need

• Rent subsidies  

• Wage subsidies (e.g. earned income tax credit) We also discuss several other topics like What is the meaning of price ceiling?

o Government uses taxes in order to raise revenue for public projects (e.g. roads,  schools, national defense, etc.)

o Tax incidence

▪ Definition:  the  manner  in  which  the  burden  of  a  tax  is  shared  among  participants in a market (i.e. whether to impose upon buyers or sellers) ▪ Tax imposed on buyers shifts the demand curve downward by the amount  of the tax

▪ Tax imposed on sellers shifts the supply curve upward by the amount of  the tax

▪ The change due to the tax is equivalent when imposed on buyers or sellers,  HOWEVER, this does not account for the administrative costs of imposing  upon buyers (i.e. federal employees stationed to collect the taxes) Don't forget about the age old question of How to measure the strength of alcohol?
Don't forget about the age old question of What are the kinds of public law?

▪ Luxury taxes

• 1990  Omnibus  Budget  Reconciliation  Act  imposed  a  10  percent  federal luxury  tax on  the  retail sale of luxury goods like pleasure  

boats with a sales price above $100,000

o Expected tax revenue: $9 billion

o Reality: the buyers’share of the tax burden was significantly  

lower than that of sellers