Unit 4: Government Intervention in Markets
What happens the moment a government sets a legal price, taxes a trade, or hands out a subsidy.
5 topics · 23 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Price Ceilings
- How it worksHow does a price ceiling set below equilibrium create a persistent shortage?
- How it worksHow does a price ceiling below equilibrium push quantity demanded up while quantity supplied falls?
- Worked exampleFind the size of the shortage when a price ceiling of 800 dollars is set and Qd = 2000 - P while Qs = -400 + P.
- Common mistakeWhy doesn't a price ceiling actually make housing more affordable for everyone who wants an apartment?
- Going furtherWhat happens to a black market for a good once a price ceiling is imposed below equilibrium?
Your turn1 of 2
A price ceiling of 804 dollars is set on a good with Qd = 2030 - P and Qs = -357 + P. What is the size of the shortage at this price ceiling?Price Floors
- How it worksHow does a price floor set above equilibrium create a persistent surplus?
- How it worksHow does a price floor set above equilibrium push quantity supplied up while buyers demand less?
- Worked exampleFind the size of the surplus when a price floor of 15 dollars is set and Qd = 200 - 5P while Qs = -40 + 10P.
- Common mistakeWhy doesn't the minimum wage always help every single worker who wants a job?
- Going furtherWhat happens to the surplus under a price floor once the floor is set only slightly above equilibrium?
Your turn1 of 2
A price floor of 21 dollars is set on a good with Qd = 203 - 5P and Qs = -36 + 10P. What is the size of the surplus at this price floor?Tax Incidence: Who Really Pays a Tax
- How it worksHow does the relative elasticity of supply and demand decide who really bears the burden of a tax?
- How it worksHow does a tax drive a wedge between the price buyers pay and the lower price sellers actually receive?
- Worked exampleFind how much of a 2 dollar tax on a good buyers pay when demand is far less elastic than supply.
- Common mistakeWhy doesn't the side of the market a tax is officially collected from tell you who actually pays it?
Your turn1 of 2
A tax of 2.54 dollars per unit is placed on a good. Demand elasticity is 0.395 and supply elasticity is 2.9 (both in absolute value). Using buyer's share equal to supply elasticity divided by the sum of both elasticities, what dollar amount of the tax do buyers pay?Deadweight Loss From a Tax
- How it worksHow does a tax wedge between the price buyers pay and the price sellers receive open up a triangle of lost trades?
- How it worksHow does the size of a deadweight-loss triangle grow with both the height of the tax and the trades it wipes out?
- Worked exampleFind the deadweight loss from a 4 dollar tax that cuts quantity traded from 100 to 80 units.
- Common mistakeWhy isn't the money a tax collects the same thing as the total cost the tax imposes on society?
- Going furtherWhat happens to the size of a tax's deadweight loss as demand for the taxed good becomes more elastic?
Your turn1 of 2
A tax of 5 dollars per unit cuts quantity traded from 103 to 83 units. What is the deadweight loss from this tax, using the standard triangle-area formula?Subsidies
- How it worksHow does a per-unit subsidy shift the effective supply curve and push output above the free-market level?
- Worked exampleFind the new quantity produced when a 2 dollar subsidy is paid on a good with Qd = 100 - 2P and Qs = -20 + 2P.
- Common mistakeWhy doesn't a subsidy make a good's true cost of production disappear rather than just shift who pays for it?
- Ties togetherHow does a subsidy's boost to output mirror a tax's deadweight loss but push quantity the other way?
Your turn1 of 2
A per-unit subsidy of 1.92 dollars is paid to producers of a good with Qd = 104 - 2.43P and Qs = -19 + 2.43P, using the same slope for both. What is the new equilibrium quantity produced after the subsidy?