CHAPTER 4 The Market strikes back

Contents of the Chapter Price controls 1. Price ceiling 2. Price floor 3. Quantity controls—quota 4. Excise tax Inefficiency

1. PRICE CEILING: The Market for Apartments in the Absence of Government Controls

The Effects of a Price Ceiling

Price ceilings often lead to inefficiency in the forms of: Inefficient allocation to consumers Wasted resources Inefficiently low quality They also produce black markets.

2. PRICE FLOOR: The Market for Butter in the Absence of Government Controls

The Effects of a Price Floor

Price floors often lead to inefficiency in the forms of: Inefficient allocation of sales among sellers Wasted resources Inefficiently high quality They can also can provide an incentive for illegal activity (Ex.: black labor). Note to the instructor: At the end of this slide, asking the question “so, why are there price floors?” and going over the second half of page 93 would be a good idea. Also, talking about “black labor” in Southern Europe would catch the attention of students.

3. QUOTA: The Market for Taxi Rides in the Absence of Government Controls

Effect of a Quota on the Market for Taxi Rides

4. EXCISE TAX: Effect of an Excise Tax Levied on the Sales of Taxi Rides

Effect of an Excise Tax Levied on Purchases of Taxi Rides

Tax INCIDENCE: The Revenue from an Excise Tax

Excise Tax: Key Terms Tax revenue Tax incidence Excess burden Deadweight loss