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1、In this chapter,look for the answers to these questions:What are price ceilings and price floors?What are some examples of each?How do price ceilings and price floors affect market outcomes?How do taxes affect market outcomes?How do the effects depend on whether the tax is imposed on buyers or selle
2、rs?What is the incidence of a tax?What determines the incidence?1第1页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES2Government Policies That Alter the Private Market Outcome Price controlsPrice ceiling:a legal maximum on the price of a good or service Example:rent control Price floor:a legal minimum on t
3、he price of a good or service Example:minimum wage TaxesThe govt can make buyers or sellers pay a specific amount on each unit bought/sold.We will use the supply/demand model to see We will use the supply/demand model to see how each policy affects the market outcome how each policy affects the mark
4、et outcome(the price buyers pay,the price sellers receive,(the price buyers pay,the price sellers receive,and eqm quantity).and eqm quantity).第2页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES3EXAMPLE 1:The Market for ApartmentsEqm w/o price controlsPQDSRental price of apts$800300Quantity of apartments第3
5、页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES4How Price Ceilings Affect Market OutcomesA price ceiling above the eqm price is not binding has no effect on the market outcome.PQDS$800300Price ceiling$1000第4页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES5How Price Ceilings Affect Market OutcomesThe eqm pric
6、e($800)is above the ceiling and therefore illegal.The ceiling is a binding constraint on the price,causes a shortage.PQDS$800Price ceiling$500250400shortage第5页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES6How Price Ceilings Affect Market OutcomesIn the long run,supply and demand are more price-elastic.
7、So,the shortage is larger.PQDS$800150Price ceiling$500450shortage第6页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES7Shortages and RationingWith a shortage,sellers must ration the goods among buyers.Some rationing mechanisms:(1)Long lines(2)Discrimination according to sellers biasesThese mechanisms are of
8、ten unfair,and inefficient:the goods do not necessarily go to the buyers who value them most highly.In contrast,when prices are not controlled,the rationing mechanism is efficient(the goods go to the buyers that value them most highly)and impersonal(and thus fair).第7页/共30页SUPPLY,DEMAND,AND GOVERNMEN
9、T POLICIES8EXAMPLE 2:The Market for Unskilled LaborEqm w/o price controlsWLDSWage paid to unskilled workers$4500Quantity of unskilled workers第8页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES9How Price Floors Affect Market OutcomesWLDS$4500Price floor$3A price floor below the eqm price is not binding has
10、 no effect on the market outcome.第9页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES10How Price Floors Affect Market OutcomesWLDS$4Price floor$5The eqm wage($4)is below the floor and therefore illegal.The floor is a binding constraint on the wage,causes a surplus(i.e.,unemployment).400550labor surplus第10页
11、/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES11Min wage laws do not affect highly skilled workers.They do affect teen workers.Studies:A 10%increase in the min wage raises teen unemployment by 1-3%.The Minimum WageWLDS$4Min.wage$5400550unemp-loyment第11页/共30页A C T I V E L E A R N I N G A C T I V E L E A
12、R N I N G 1 1 Price controlsQPS0The market for hotel roomsDDetermine effects of:A.$90 price ceilingB.$90 price floorC.$120 price floor12第12页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES13Evaluating Price ControlsRecall one of the Ten Principles from Chapter 1:Markets are usually a good way to organize
13、economic activity.Prices are the signals that guide the allocation of societys resources.This allocation is altered when policymakers restrict prices.Price controls often intended to help the poor,but often hurt more than help.第13页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES14TaxesThe govt levies taxe
14、s on many goods&services to raise revenue to pay for national defense,public schools,etc.The govt can make buyers or sellers pay the tax.The tax can be a%of the goods price,or a specific amount for each unit sold.For simplicity,we analyze per-unit taxes only.第14页/共30页SUPPLY,DEMAND,AND GOVERNMENT POL
15、ICIES15S1EXAMPLE 3:The Market for PizzaEqm w/o taxPQD1$10.00500第15页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES16S1D1$10.00500A Tax on BuyersThe price buyers pay is now$1.50 higher than the market price P.P would have to fallby$1.50 to makebuyers willing to buy same Q as before.E.g.,if P falls from$10
16、.00 to$8.50,buyers still willing topurchase 500 pizzas.PQD2Effects of a$1.50 per unit tax on buyers$8.50Hence,a tax on buyers shifts the D curve down by the amount of the tax.Tax第16页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES17S1D1$10.00500A Tax on BuyersPQD2$11.00PB=$9.50PS=TaxEffects of a$1.50 per
17、unit tax on buyersNew eqm:Q=450Sellers receive PS=$9.50Buyers pay PB=$11.00Difference between them =$1.50=tax450第17页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES18450S1The Incidence of a Tax:how the burden of a tax is shared among market participantsPQD1$10.00500D2$11.00PB=$9.50PS=TaxIn our example,buy
18、ers pay$1.00 more,sellers get$0.50 less.第18页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES19S1A Tax on SellersPQD1$10.00500S2Effects of a$1.50 per unit tax on sellersThe tax effectively raises sellers costs by$1.50 per pizza.Sellers will supply 500 pizzas only if P rises to$11.50,to compensate for this
19、cost increase.$11.50Hence,a tax on sellers shifts the S curve up by the amount of the tax.Tax第19页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES20S1A Tax on SellersPQD1$10.00500S2450$11.00PB=$9.50PS=TaxEffects of a$1.50 per unit tax on sellersNew eqm:Q=450Buyers pay PB=$11.00Sellers receive PS=$9.50Diffe
20、rence between them =$1.50=tax第20页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES21S1The Outcome Is the Same in Both Cases!What matters is this:A tax drives a wedge between the price buyers pay and the price sellers receive.PQD1$10.00500450$9.50$11.00PB=PS=TaxThe effects on P and Q,and the tax incidence a
21、re the same whether the tax is imposed on buyers or sellers!第21页/共30页A C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Effects of a taxQPS0The market for hotel roomsDSuppose govt imposes a tax on buyers of$30 per room.Find new Q,PB,PS,and incidence of tax.第22页/共30页SUPPLY,DEMAND,AND GOVERNM
22、ENT POLICIES23Elasticity and Tax IncidenceCASE 1:Supply is more elastic than demandPQDSTaxBuyers share of tax burdenSellers share of tax burdenPrice if no taxPBPSIts easier for sellers than buyers to leave the market.So buyers bear most of the burden of the tax.第23页/共30页SUPPLY,DEMAND,AND GOVERNMENT
23、POLICIES24Elasticity and Tax IncidenceCASE 2:Demand is more elastic than supplyPQDSTaxBuyers share of tax burdenSellers share of tax burdenPrice if no taxPBPSIts easier for buyers than sellers to leave the market.Sellers bear most of the burden of the tax.第24页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICI
24、ES25CASE STUDY:Who Pays the Luxury Tax?1990:Congress adopted a luxury tax on yachts,private airplanes,furs,expensive cars,etc.Goal of the tax:raise revenue from those who could most easily afford to pay wealthy consumers.But who really pays this tax?第25页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES26CA
25、SE STUDY:Who Pays the Luxury Tax?The market for yachtsPQDSTaxBuyers share of tax burdenSellers share of tax burdenPBPSDemand is price-elastic.In the short run,supply is inelastic.Hence,companies that build yachts pay most of the tax.第26页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES27CONCLUSION:Governme
26、nt Policies and the Allocation of ResourcesEach of the policies in this chapter affects the allocation of societys resources.Example 1:A tax on pizza reduces eqm Q.With less production of pizza,resources(workers,ovens,cheese)will become available to other industries.Example 2:A binding minimum wage
27、causes a surplus of workers,a waste of resources.So,its important for policymakers to apply such policies very carefully.第27页/共30页CHAPTER SUMMARYA price ceiling is a legal maximum on the price of a good.An example is rent control.If the price ceiling is below the eqm price,it is binding and causes a
28、 shortage.A price floor is a legal minimum on the price of a good.An example is the minimum wage.If the price floor is above the eqm price,it is binding and causes a surplus.The labor surplus caused by the minimum wage is unemployment.28第28页/共30页CHAPTER SUMMARYA tax on a good places a wedge between
29、the price buyers pay and the price sellers receive,and causes the eqm quantity to fall,whether the tax is imposed on buyers or sellers.The incidence of a tax is the division of the burden of the tax between buyers and sellers,and does not depend on whether the tax is imposed on buyers or sellers.The incidence of the tax depends on the price elasticities of supply and demand.29第29页/共30页SUPPLY,DEMAND,AND GOVERNMENT POLICIES30谢谢您的观看!第30页/共30页