7-4 - G o v e r n m e n t In te r v e n tio n a s Im p lic...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Taxation by another name 7-4 Price Control Government Intervention as Implicit Taxation • Government intervention in the form of price controls can be viewed as a combination tax and subsidy. • A price ceiling is an implicit tax on producers and an implicit subsidy to producers that causes a welfare loss identical to the loss from taxation. • A price floor is a tax on consumers and a subsidy for producers that transfers consumer surplus to producers. Price Ceilings • A price ceiling is a government-set price below market equilibrium price. • It is an implicit tax on producers and an implicit subsidy to consumers. Effect of a Price Ceiling P 0 Q 0 Quantity Price Q 1 S D Producer surplus Consumer surplus Welfare loss P 1 Price ceiling Transferred to consumers F D C E B A
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Price Floors • A price floor is a government-set price above equilibrium price. • It is a tax on consumers and a subsidy to producers. • Price floors transfer consumer surplus to producers. Effect of a Price Floor P 0 Q 0 Quantity Price Q 1 S D Producer surplus Consumer surplus Welfare loss Transferred to producers F D C E B A P 1 Price floor The Difference Between Taxes and Price Controls • Price ceilings create shortages and taxes do not unless people try to evade them. • Taxes leave people free to choose how much to supply and consume as long as they pay the tax. • Shortages also create black markets. A Price Ceiling with Forced Supply • The draft is an example of a price ceiling with forced supply. • A draft must be imposed when the wage offered by the army is below equilibrium and the quantity of soldiers supplied is below the quantity demanded.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/01/2011 for the course ECON 101 taught by Professor E during the Spring '10 term at American College of Computer & Information Sciences.

Page1 / 7

7-4 - G o v e r n m e n t In te r v e n tio n a s Im p lic...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online