There are no externalities to worry about There is a very strong perfect

There are no externalities to worry about there is a

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There are no externalities to worry about. There is a very strong (perfect) competition among the producers and consumers in the market. Price floor: a legally minimum price set below the market equilibrium price A price floor set below the market equilibrium price would have no impact and would be non- binding Binding price floor: a legally minimum price set above the market equilibrium price Excess supply in the market Resource misallocation: the difference between what should be produced and consumed (Qe) and what is actually being produced and consumed Resource misallocation is created when resources are not being used in their most efficient manner RM is measured as the difference between the socially optimal quantity produced and consumed and the quantity that is actually produced and consumed Causes a reduction in economic surplus Can be caused by gov intervention in a market Deadweight loss (DWL): the reduction in economic surplus that results from the misallocation of resources If the market is not experiencing a failure, buyers and sellers are both responsive to price changes, binding price celling or a binding price floor will create a DWL Loss of economic surplus that society suffers when the gov interferes in a well functioning free market If buyers and sellers are responsive to price changes, the taxes (assuming they are not pigovian) create DWL DWL to the economy: A tax placed on the demanders of a product A subsidy offered to the demanders of a product A tax placed on the suppliers of a product A subsidy offered to the suppliers of a product
Price ceiling: a legally set maximum price for the market Provides a gain for sellers but a loss for buyers Results in DWL when: Producers must be responsible to price changes The price ceiling must be set below the equilibrium market price The price ceiling must cause RM Binding ceiling: a legally maximum price set below the market equilibrium price A price ceiling in the housing market is commonly referred to as a rent-control policy Will result in an excess demand for a product Graphed by a horizontal line below the equilibrium price Pigovian taxes : taxes used to fix the problem of a negative externality (not harmful to economic efficiency because they are used to fix an already existing market problem) -Tax placed on cigs or gas improves economic efficiency & raises the amount of economic surplus available to society Taxes: not imposed to fix an externality problem, placed on well-functioning markets for the prupose of raising tax revenue -Economic cost to society- RM & DWL -Supply curve shows us the workers reservation wage (reservation price) and won’t work below it Tax on suppliers shifts the supply curve to the left . (Tax on employers of labor) It is possible (but not certain) that suppliers will bear the entire burden of the tax The tax will be shared between suppliers and demanders according to how price responsive they are Buyer’s price (Pb):

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