Chapter 6 example #79075

a regulation that makes it illegal to charge a price higher than a specified level

a rent ceiling

It has no effect. The market works as if there were no ceiling.

it has powerful effects

the illegal region

Search activity & black markets

The time spent looking for someone with whom to do business with

it increases

Activity cost is costly and the opportunity cost of housing equals its rent (regulated) plus the opportunity cost of the search activity (unregulated).

Because the quantity of housing is less than the quantity in an unregulated market.

illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed

A shortage of housing

Illegal arrangements are made between renters and landlords

A rent ceiling set below the equilibrium rent. The marginal social benefit from housing services exceeds its marginal social cost and a deadweight loss arises

is unfair because it blocks voluntary exchange, does not generally benefit the poor

Lottery; First-come, first-served; Discrimination. None of these methods leads to a fair outcome.

gives scarce housing to the lucky

gives scarce housing to those who have the greatest foresight and get their names on the list first

gives scarce housing to friends, family members, or those of the selected sex, or those without a dog

a regulation that makes it illegal to trade at a price lower than a specified level

When a price floor is applied to labour markets

It has no effect. The market works as if there were no minimum wage.

It has powerful effects

the quantity of labour supplied by workers exceeds the quantity demanded by employers & there is a surplus of labour. The quantity of labour hired at the minimum wage is less than the quantity that would be hired in an unregulated labour market.

it creates unemployment

an inefficient outcome. The quantity of labour employed is less than the efficient quantity.

the marginal social cost of labour to workers (leisure forgone)

the marginal social benefit from labour (value of goods produced)

increase the unemployment rate of low-skilled younger workers

is the division of the burden of a tax between buyers and sellers.

by the full amount of the tax, by a lesser amount, or not at all

buyers pay the tax

buyers and sellers share the burden of the tax

sellers pay the tax

No. The law might impose a tax on buyers or sellers, but the outcome will be the same.

the elasticities of demand and supply

Buyer pays the entire tax

Sellers pay the entire tax

the larger is the buyers' share of the tax

Sellers pay the entire tax

Buyers pay the entire tax

the larger is the buyers' share of the tax

goods and services with an inelastic demand or an inelastic supply

Alcohol, tobacco, and gasoline have, so the buyers of these items pay most the tax on them.

Labour has a low elasticity of supply, so the seller—the worker—pays most of the income tax and most of the Social Security tax.

Except in the extreme cases of perfectly inelastic demand or perfectly inelastic supply when the quantity remains the same, imposing a tax creates inefficiency.

marginal social benefit equals marginal social cost and the market is efficient.

Total surplus (the sum of consumer surplus and producer surplus) is maximized

Marginal social benefit exceeds marginal social cost and the tax is inefficient.

The tax revenue takes part of the total surplus & the decreased quantity creates a deadweight loss.

The benefits principle & the ability-to-pay principle

the proposition that people should pay taxes equal to the benefits they receive from the services provided by government; this arrangement is fair because it means that those who benefit most pay the most taxes

the proposition that people should pay taxes according to how easily they can bear the burden of the tax.

A rich person can more easily bear the burden than a poor person can.

justifies high rates of income tax on high incomes