Chapter 6 Notes

Chapter 6 Notes - inefficient and also it is unfair When...

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Chapter 6 03/05/07 Government policies that alter the private market outcome - Price controls Price ceiling: A legal maximum on the price of a good or service. (Ex. Rent) Price floor: A legal minimum on the price of a good or service. (Ex. Minimum Wage) - Taxes The government can make buyers or sellers pay a specific amount on each good bought/sold. - Supply and demand becomes more price-elastic in the long run. Creates larger shortages - 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. Not fair because some buyers get lower prices but others have to wait in line for these prices. Discrimination according to seller’s bias is both
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Unformatted text preview: inefficient and also it is unfair. When prices are not controlled, the rationing mechanism is efficient and impersonal.-Price Floor A price floor below the eq. is not binding and does not have an effect on the market. -Evaluating Price Controls 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 then help.-Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium.-Elasticity and Tax Incidence Case 1: Supply is more elastic than demand Case 2: Demand is more elastic than supply...
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