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In this chapter you will examine the effects of government policies that place a ceiling on prices, examine the effects of government policies that put a floor under prices, consider how a tax on a good affects the price of the good and the quantity sold, learn that taxes levied on buyers and taxes levied on sellers are equivalent. | Supply, Demand and Government Policies Chapter 6 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Supply, Demand, and Government Policies In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. One of the things government can do is to set price controls when the market price is seen as unfair to either buyers or sellers. 2 2 Price Ceilings & Price Floors Price Ceiling A legally established maximum price at which a good can be sold. (Rent Controls) Price Floor A legally established minimum price at which a good can be sold. (Price Supports for Agriculture) 4 4 Price Ceilings Two outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is . | Supply, Demand and Government Policies Chapter 6 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Supply, Demand, and Government Policies In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. One of the things government can do is to set price controls when the market price is seen as unfair to either buyers or sellers. 2 2 Price Ceilings & Price Floors Price Ceiling A legally established maximum price at which a good can be sold. (Rent Controls) Price Floor A legally established minimum price at which a good can be sold. (Price Supports for Agriculture) 4 4 Price Ceilings Two outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is binding if set below the equilibrium price, leading to a shortage. Binding means that there is an economic impact. 5 5 A Price Ceiling That Is Binding. $3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 2 Demand Supply Equilibrium price Price ceiling Shortage 125 Quantity demanded 75 Quantity supplied Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 10 7 A Price Ceiling That Is Not Binding. $4 3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Demand Supply Price ceiling Equilibrium price 100 Equilibrium quantity Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 7 6 Effects of Price Ceilings A binding price ceiling creates . shortages because QD > QS. Example: Gasoline shortage of the 1970s nonprice rationing Examples: Long lines, Discrimination by sellers 14 11 The Price Ceiling on Gasoline Is Not Binding. $4 P1 Quantity of Gasoline 0 Price of Gasoline Q1 Demand Supply Price ceiling 1. Initially, the price ceiling is not
