Transcript Chapter Six
Supply, Demand, and Government Policies
• In a competitive, unregulated market system, market forces establish equilibrium prices and facilitate mutually beneficial voluntary exchange.
• While equilibrium conditions may be efficient, it may be true that not everyone is satisfied. • One of the roles of economists is to use their theories to assist in the development of policies.
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CONTROLS ON PRICES
• Price controls are usually enacted when policymakers believe the market price is unfair to buyers or sellers. •
Price Ceiling: Rent Control (apartment rental)
• A legal
maximum
on the price at which a good can be bought and sold (designed to help buyers). •
Price Floor: Minimum Wage (labor)
• A legal
minimum
on the price at which a good can be bought and sold (designed to help sellers).
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How Taxes on Buyers (and Sellers) Affect Market Outcomes
• Governments levy taxes to raise revenue for public projects.
• Gasoline, Cigarettes, Alcohol, Food,
Labor
• Governments also levy taxes to discourage certain activities.
• Gasoline, Cigarettes, Alcohol, Food,
Labor Copyright © 2004 South-Western/Thomson Learning
Elasticity and Tax Incidence • Tax incidence is the study of who bears the burden of a tax in a market (split burden).
• Placing a tax in a market changes the equilibrium price(s) and quantity.
• Compared to the competitive market equilibrium outcome: • Buyers pay a higher price, sellers receive a lower price.
• Fewer units are bought and sold.
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Elasticity and Tax Incidence • How do taxes affect sellers and buyers?
• How is the burden split? • How much revenue is raised?
• The answers to these questions depend on the price elasticities of demand and supply.
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ELASTICITY AND TAX INCIDENCE
So, how is the burden of the tax divided?
• The burden of a tax falls more heavily on the side of the market that is less elastic.
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Summary
• Price controls are government regulated prices.
• A price ceiling is a regulated maximum price of a good or service such as rent control.
• A price floor is a regulated minimum price of a good or a service such as a minimum wage.
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Summary
• Taxes are used to raise revenue for public projects and also to discourage certain activities.
• When the government levies a tax in a market, the equilibrium quantity of the good falls.
• A tax in a market creates a wedge between the buyer’s price and the seller’s price. Sellers receive a lower price and buyers pay a higher price.
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Summary
• The incidence of a tax refers to who bears the burden of a tax.
• The incidence of a tax depends on the price elasticities of supply and demand.
• The tax burden tends to fall more heavily on the inelastic side of the market.
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