ECON 200 Chapter Notes - Chapter 6: Deadweight Loss, Tax Wedge, Trans Fat
Document Summary
Microeconomics: government intervention: objectives, calculate the effect of a price ceiling on the equilibrium price and quantity, price ceilings raise demand while lowering supply; shortages may result if the price ceiling is below market price. Price floors increase equilibrium price while decreasing equilibrium quantity: calculate the effect of a tax on the equilibrium price and quantity, taxes increase the cost of doing business. Examples include drugs such as cocaine and heroin: governments may increase the price of certain bad products by taxing them, thus raising the total price buyers pay and discouraging them from purchasing them. Examples include cigarettes and alcoholic drinks: governments may subsidize certain good products to encourage people to consume them. If mexico sets a price ceiling for tortillas at sh. 25 per pound, demand rises by 50%, while supply drops an equal percentage. This is a price floor: supply thus increases by 33%, but demand decreases a similar amount.