Principles of Economics- Mankiw (5th) 114

Principles of Economics- Mankiw (5th) 114 - 118 PA R T T W...

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118 PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK usually enacted when policymakers believe that the market price of a good or ser- vice is unfair to buyers or sellers. Yet, as we will see, these policies can generate in- equities of their own. After our discussion of price controls, we next consider the impact of taxes. Policymakers use taxes both to influence market outcomes and to raise revenue for public purposes. Although the prevalence of taxes in our economy is obvious, their effects are not. For example, when the government levies a tax on the amount that firms pay their workers, do the firms or the workers bear the burden of the tax? The answer is not at all clear—until we apply the powerful tools of supply and demand. CONTROLS ON PRICES To see how price controls affect market outcomes, let’s look once again at the mar- ket for ice cream. As we saw in Chapter 4, if ice cream is sold in a competitive mar- ket free of government regulation, the price of ice cream adjusts to balance supply
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