ECN 104 Study Guide - Price Ceiling, Price Floor, Tax Incidence
Economics Chapter 6
Supply, Demand, and Government Policies
Price Ceiling: A legal maximum on the price at which a good or service can be sold Ex. Rent control
Price Floor: A legal minimum on the price at which a good or service can be sold Ex. Minimum wage
Taxes The govt. can make buyers or sellers pay a specific amount on each unit bought/sold.
We will use the supply/demand model to see how each policy affects the market outcome
(the price buyers pay, the price sellers receive, and eq’m quantity).
Example 1: The Market for Apartments
How price ceilings affect market outcomes
Shortages and Rationing
With a shortage, sellers must ration the goods among buyers.
Some rationing mechanisms: (1) Long lines (2) Discrimination according to sellers’ biases
These mechanisms are often 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).
Example 2: The market for unskilled labor How price floors affect market outcomes
The Minimum Wage
Determine effects of: A)
A. $90 price ceiling
B. $90 price floor
C.$120 price floor
Evaluating price controls
Recall one of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic
Prices are the signals that guide the allocation of society’s resources. This allocation is altered when
policymakers restrict prices.
Price controls often intended to help the poor, but often hurt more than help.
Taxes: The govt levies taxes 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 good’s price, or a specific amount for each unit sold. (For simplicity, we
analyze per-unit taxes only. )