1、6,Supply, Demand, and Government Policies,LEARNING OBJECTIVES,By the end of this chapter, we should understand: the effects of government policies that place a ceiling on prices. the effects of government policies that put a floor under prices. how a tax on a good affects the price of the good and t
2、he quantity sold. that taxes levied on buyers and taxes levied on sellers are equivalent. how the burden of a tax is split between buyers and sellers.,Supply, Demand, and Government Policies,In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. Whi
3、le 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.,CONTROLS ON PRICES,Are usually enacted when policymakers believe the market price is unfair to buyers or seller
4、s. Result in government-created price ceilings and floors.,CONTROLS ON PRICES,Price Ceiling A legal maximum on the price at which a good can be sold. Price Floor A legal minimum on the price at which a good can be sold.,How Price Ceilings Affect Market Outcomes,Two outcomes are possible when the gov
5、ernment imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is binding if set below the equilibrium price, leading to a shortage.,Figure 1 A Market with a Price Ceiling,(a) A Price Ceiling That Is Not Binding,Quantity of,Ice-Cream,Cones,0,P
6、rice of,Ice-Cream,Cone,Figure 1 A Market with a Price Ceiling,Copyright2003 Southwestern/Thomson Learning,(b) A Price Ceiling That Is Binding,Quantity of,Ice-Cream,Cones,0,Price of,Ice-Cream,Cone,How Price Ceilings Affect Market Outcomes,Effects of Price Ceilings A binding price ceiling createsshort
7、ages because QD QS. Example: Gasoline shortage of the 1970snonprice rationing Examples: Long lines, discrimination by sellers,In 1973, OPEC raised the price of crude oil in world markets. Crude oil is the major input in gasoline, so the higher oil prices reduced the supply of gasoline. What was resp
8、onsible for the long gas lines?,CASE STUDY: Lines at the Gas Pump,Economists blame government regulations that limited the price oil companies could charge for gasoline.,Figure 2 The Market for Gasoline with a Price Ceiling,Copyright2003 Southwestern/Thomson Learning,(a) The Price Ceiling on Gasolin
9、e Is Not Binding,Quantity of,Gasoline,0,Price of,Gasoline,Figure 2 The Market for Gasoline with a Price Ceiling,Copyright2003 Southwestern/Thomson Learning,(b) The Price Ceiling on Gasoline Is Binding,Quantity of,Gasoline,0,Price of,Gasoline,CASE STUDY: Rent Control in the Short Run and Long Run,Ren
10、t controls are ceilings placed on the rents that landlords may charge their tenants. The goal of rent control policy is to help the poor by making housing more affordable. One economist called rent control “the best way to destroy a city, other than bombing.”,Figure 3 Rent Control in the Short Run a
11、nd in the Long Run,Copyright2003 Southwestern/Thomson Learning,(a) Rent Control in the Short Run,(supply and demand are inelastic),Quantity of,Apartments,0,Rental,Price of,Apartment,Figure 3 Rent Control in the Short Run and in the Long Run,Copyright2003 Southwestern/Thomson Learning,(b) Rent Contro
12、l in the Long Run,(supply and demand are elastic),0,Rental,Price of,Apartment,Quantity of,Apartments,How Price Floors Affect Market Outcomes,When the government imposes a price floor, two outcomes are possible. The price floor is not binding if set below the equilibrium price. The price floor is bin
13、ding if set above the equilibrium price, leading to a surplus.,Figure 4 A Market with a Price Floor,Copyright2003 Southwestern/Thomson Learning,(a) A Price Floor That Is Not Binding,Quantity of,Ice-Cream,Cones,0,Price of,Ice-Cream,Cone,Figure 4 A Market with a Price Floor,Copyright2003 Southwestern/
14、Thomson Learning,(b) A Price Floor That Is Binding,Quantity of,Ice-Cream,Cones,0,Price of,Ice-Cream,Cone,How Price Floors Affect Market Outcomes,A price floor prevents supply and demand from moving toward the equilibrium price and quantity. When the market price hits the floor, it can fall no furthe
15、r, and the market price equals the floor price.,How Price Floors Affect Market Outcomes,A binding price floor causes . . .a surplus because QS QD. nonprice rationing is an alternative mechanism for rationing the good, using discrimination criteria. Examples: The minimum wage, agricultural price supp
16、orts,The Minimum Wage,An important example of a price floor is the minimum wage. Minimum wage laws dictate the lowest price possible for labor that any employer may pay.,Figure 5 How the Minimum Wage Affects the Labor Market,Copyright2003 Southwestern/Thomson Learning,Quantity of Labor,Wage,0,Figure
17、 5 How the Minimum Wage Affects the Labor Market,Copyright2003 Southwestern/Thomson Learning,Quantity of Labor,Wage,0,TAXES,Governments levy taxes to raise revenue for public projects.,How Taxes on Buyers (and Sellers) Affect Market Outcomes,Taxes discourage market activity. When a good is taxed, th
18、e quantity sold is smaller. Buyers and sellers share the tax burden.,Elasticity and Tax Incidence,Tax incidence is the manner in which the burden of a tax is shared among participants in a market.,Elasticity and Tax Incidence,Tax incidence is the study of who bears the burden of a tax. Taxes result
19、in a change in market equilibrium. Buyers pay more and sellers receive less, regardless of whom the tax is levied on.,Figure 6 A Tax on Buyers,Copyright2003 Southwestern/Thomson Learning,Quantity of,Ice-Cream Cones,0,Price of,Ice-Cream,Cone,Elasticity and Tax Incidence,What was the impact of tax? Ta
20、xes discourage market activity. When a good is taxed, the quantity sold is smaller. Buyers and sellers share the tax burden.,Figure 7 A Tax on Sellers,Copyright2003 Southwestern/Thomson Learning,Quantity of,Ice-Cream Cones,0,Price of,Ice-Cream,Cone,Figure 8 A Payroll Tax,Copyright2003 Southwestern/T
21、homson Learning,Quantity,of Labor,0,Wage,Elasticity and Tax Incidence,In what proportions is the burden of the tax divided? How do the effects of taxes on sellers compare to those levied on buyers? The answers to these questions depend on the elasticity of demand and the elasticity of supply.,Figure
22、 9 How the Burden of a Tax Is Divided,Copyright2003 Southwestern/Thomson Learning,Quantity,0,Price,(a) Elastic Supply, Inelastic Demand,Figure 9 How the Burden of a Tax Is Divided,Copyright2003 Southwestern/Thomson Learning,Quantity,0,Price,(b) Inelastic Supply, Elastic Demand,So, how is the burden
23、of the tax divided?The burden of a tax falls more heavily on the side of the market that is less elastic.,ELASTICITY AND TAX INCIDENCE,Summary,Price controls include price ceilings and price floors.A price ceiling is a legal maximum on the price of a good or service. An example is rent control. A pr
24、ice floor is a legal minimum on the price of a good or a service. An example is the minimum wage.,Summary,Taxes are used to raise revenue for public purposes. When the government levies a tax on a good, the equilibrium quantity of the good falls. A tax on a good places a wedge between the price paid
25、 by buyers and the price received by sellers.,Summary,The incidence of a tax refers to who bears the burden of a tax. The incidence of a tax does not depend on whether the tax is levied on buyers or sellers. The incidence of the tax depends on the price elasticities of supply and demand. The burden tends to fall on the side of the market that is less elastic.,
