Chapter 4: Government Price Setting and Taxes
I. Direct Government Intervention in the Market: in equilibrium, we all pay the
market price. However, situation might arise in which government alters
A. Price ceiling legally determined maximum price sellers may charge (rent
controls in NYC). Must be imposed below market price to be binding…if
not they’d just charge the market price and it wouldn’t do shit.
•economic impact of price ceiling
a. lowers market price
b. demand is up (because price is lowered)
c. shortage occurs (no incentive for producers to make them if they
don’t get any profit)
B. Price floor firms get government to set legally determined minimum price
that they may receive for their goods (minimum wage).
• economic impact of price floor
a. quantity supplied increases (when wages rise because of
minimum wage requirements, there are a lot of people willing to
work. Too many= unemployment).
II. Welfare Economics looks at wellbeing of buyers and sellers
A. Consumer surplus difference between what consumer is willing to pay
and what they do pay (if they’re willing to pay $20 and the price is only
$12, the consumer surplus