Unit 6: Government Policies in Markets
What happens when a law overrides the price a market would have found on its own, and who actually ends up paying a tax.
5 topics · 19 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 and Rent Control
- How it worksHow does a price ceiling set below the equilibrium price create a persistent shortage?
- Worked exampleFind the size of the shortage in a rental market where quantity demanded is 12000 units and quantity supplied is 8000 units at the controlled rent.
- Common mistakeWhy doesn't rent control actually make housing more affordable for most renters looking for a place?
- Going furtherWhat happens to landlords' incentive to maintain a rent-controlled building compared with one renting at the market price?
Your turn1 of 2
Find the size of the shortage in a rental market where quantity demanded is 13482 units and quantity supplied is 7947 units at the controlled rent.Price Floors
- How it worksHow does a price floor set above the equilibrium price create a surplus of the good?
- Worked exampleFind the size of the surplus in a labor market where 50 workers are supplied and 40 are demanded at the price floor.
- Common mistakeWhy doesn't a price floor help every seller in the market equally?
Your turn1 of 2
Find the size of the surplus in a labor market where 54 workers are supplied and 35 are demanded at the price floor.The Minimum Wage Debate
- How it worksHow does a minimum wage act as a price floor in the specific market for low-skilled labor?
- Common mistakeWhy doesn't a higher minimum wage always show up as a big drop in low-wage employment in the data?
- Common mistakeWhy isn't a small, well-targeted minimum wage increase guaranteed to follow the same textbook prediction as a very large one?
- Going furtherWhat happens to the size of a minimum wage's effect on jobs when the wage floor is set only slightly above equilibrium versus far above it?
- Ties togetherHow does the empirical debate over the minimum wage connect to the idea that elasticity, not theory alone, decides the real-world size of an effect?
Your turn1 of 2
Simple supply-and-demand theory predicts a price floor on low-skilled labor should create a clear surplus of workers, unemployment. Yet many empirical studies of modest minimum wage increases find little to no measurable drop in employment. Does this mean the basic theory is simply wrong?Who Really Pays a Tax
- How it worksHow does a tax wedge between what buyers pay and what sellers receive show up the same way no matter who writes the check to the government?
- Common mistakeWhy isn't the person who physically hands the tax to the government necessarily the one who bears its cost?
- Worked exampleWalk me through a 1 dollar per unit tax on sellers that raises the buyer's price by 60 cents and cuts the seller's take by 40 cents.
Your turn1 of 2
A 3 dollar per unit tax raises the buyer's price by 1.15 dollars. How many dollars does the seller's price fall by?Tax Incidence and Relative Elasticity
- How it worksHow does the side of the market with the less elastic curve end up bearing the larger share of a tax?
- Worked exampleFind how a 2 dollar tax splits between buyers and sellers when demand is much less elastic than supply.
- Common mistakeWhy doesn't a 50-50 split of a tax's legal burden mean the two sides feel an equal economic burden?
- Going furtherWhat happens to the split of a tax's burden when demand becomes almost perfectly elastic?
Your turn1 of 2
Find how many dollars of a 3 dollar tax buyers pay when demand has an elasticity of 0.46 and supply has an elasticity of 2.9, both positive magnitudes, using tax times supply elasticity divided by the sum of the two elasticities.