1. Government Involvement

2. #1 – Price Controls
Who likes the idea of having a price ceiling on gas so prices will never go over $1 a gallon?

3. Price Ceiling Maximum legal price a seller can charge for a product
Goal: Make product affordable by keeping price from reaching equilibrium

4. To have an effect a price ceiling must be below equilibrium

5. Price Floor Minimum legal price a seller can sell a product
Goal: Keep price high by keeping price from falling to equilibrium

6. To have an effect a price floor must be above equilibrium

7. Practice Questions
Which of the following will occur if a legal price floor is placed on a good below its free market equilibrium?
Surplus will develop
Shortages will develop
Underground markets will develop
The equilibrium price will remain the same
The quantity sold will increase
Which of the following statements about price controls is true?
A price ceiling causes a shortage if the ceiling price is above the equilibrium price
A price floor causes a surplus if the price floor is below the equilibrium price
Price ceilings and price floors result in a misallocation of resources
Price floors above equilibrium cause a shortage

8. Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumer and producer surpluses

12. #2 – Import Quotas A quota is a limit on number of imports
The government sets the maximum amount that can come in the country
Purpose:
To protect domestic producers from a cheaper world price
To prevent domestic unemployment

13. International Trade & Quotas

15. #3 - Subsidies The government just gives producers money
The goal is for them to make more of the goods that the government things are important
Ex:
Agriculture (to prevent famine)
Pharmaceutical Companies
Environmentally Safe Vehicles
Student Loans

16. Result of Subsidies to Corn Producers

18. #4 – Excise Taxes Excise tax = a per unit tax on producers
For every unit made the producer must pay money
Not a lump sum (one time only) tax
The goal is for them to make less of the goods that the government deems dangerous or unwantedd
Ex:
Cigarettes
Alcohol
Tariffs on imported goods
Environmentally unsafe products

19. Excise Tax

24. Tax Practice

25. Excise Tax 12 P Stax S $14 11 Pc 8 Pp D 12 10 Q Calculate Tax Per Unit
Total Tax Revenue
Amount of Tax paid by consumers
Amount of Tax paid by producers
Total Expenditures
Total Revenue for firms P
Stax
$14 12 11 8 S Pc Pp D 10 12 Q

26. Excise Tax Calculate CS Before Tax Total Expenditures Before Tax
Tax Per Unit
Total Tax Revenue that goes to Government
Amount of Tax paid by consumers
Amount of Tax paid by producers
Total Expenditures after tax
Total Revenue for firms after tax
CS After Tax
DWL