In a market free of government regulation, prices are dictated simply by supply and
demand. Markets get much more complicated and complex when you add government
restrictions (I.E price floors and ceilings and much more).
The two most common government restrictions are price floors and price ceilings. A price
floor is a set price that an item or unit of labor cannot go below. The best example of a
price floor is minimum wage. A price ceiling however, is the opposite. It is that a good or
unit of labor cannot exceed this price. A good example of that is a maximum rent on
housing in a specific area. Both floors and ceilings are used for different things that will
probably be discussed in later chapters.
Now when the government imposes a ceiling, it can either be binding or not. Binding
ultimately means affecting the equilibrium point. If the equilibrium point is at $5 and the
gov says you cannot make this good more that $600 dollars a unit, it is not binding
because the equilibrium point can flow until it reaches that high.
To understand all of this, it is important to know that supply and demand is elastic in the
long run. Even with a price fix, such as rent, tenants will move in quickly to apartments,
and landlords will make money. However, they will maintain their land less because they
have no incentive to make it nicer because they cant increase rent! Price floors and
ceilings do good things but definitely have negative externalities attached to them. When
the gov imposes a ceiling on rent, landlords wont build any more buildings. People really
want cheap housing, so demand is high, but supply will remain constant (if not decrease).
Thus, it creates a shortage in the housing market.
The entire point of price floors and ceilings is to change the equilibrium point.
There are many advocated and people against minimum wage. It has a lot of adverse
sideeffects. People correctly point out that 2 adults working 40 hour a week jobs on
minimum wage in 2009 make just over $30,000 a year. That is less than 2/3 of the
national household income average. That is why majority of economists favor getting rid
of the minimum wage because it doesn’t really help the poor.
Tax incidence is the manner of which the burden of taxes is shared between participants
in a market.
Taxes affect a lot more than just t