1. Government Influences on Markets & Taxes  As Governments attempt to maximize welfare of constituents:  Government Influences that can create both inefficiency and unfairness Rent Ceilings Minimum Wage Laws Production Quotas  Taxation Issues Impact of sales & excise taxes Impact of income and social security taxes Fairness of tax systems

2. Government Influence on Markets Price Ceilings/Rent Ceiling Price Ceiling – The highest price at which it is legal to trade a particular good, service, or factor of production. Rent Ceiling – An example of a price ceiling. A government regulation that makes it illegal to charge more than a specified rent for housing.

3. Government Influence on Markets Rent Ceilings The impact of a rent depends upon whether it is imposed at a level above or below the equilibrium rent. Rent ceilings above the equilibrium price have no market impact Rent ceilings below the equilibrium price have significant market impact

4. Rent Ceiling Inefficiencies

5. Government Influence on Markets Impact of Price Ceilings Rent Ceilings Below the Equilibrium 1. Create Shortages 2. Create Allocation Problems 3. Incent Black Market Activity 4. Increase the Search Time and Expense for Housing, and 5. Oftentimes Cause People to Pay More than if the Market were allowed to operate

6. Government Influence on Markets Rent Ceilings are Unfair Rent Ceilings Deliver Unfair Results Housing Shortages Created – Allocation Schemes – Discrimination/Black Markets Rent Ceilings Impose Unfair Rules Block Voluntary Exchange – Rentors want to Rent more Units but are Blocked by Rent Controls

7. Government Influences on Markets Why Rent Controls? There are beneficiaries – Families that are in units and have been for a period of time People looking for housing know that it will be cheaper than market if they can find it Becomes a political issue where oftentimes more people support rent controls than don’t

8. Government Influences on Markets Price Floors; Minimum Wage Price Floor: The lowest price at which it is legal to trade a particular good, service or factor of production Minimum Wage: An example of a price floor. A government regulation that makes hiring labor for less than a minimum amount illegal

9. Government Influences on Markets Minimum Wages The impact of a minimum wage law depends upon whether it is imposed above or below the market equilibrium Minimum Wage levels below the market equilibrium have no impact; the market will bid wages higher than the minimum wage Minimum Wage levels above the market will have significant market impact

10. Minimum Wage Inefficiencies

11. Government Influence on Markets Impact of Minimum Wage Law Create Labor Surplus; may hurt the very people it is designed to help! Forces people to spend more time in job searches; especially for that “better” job May create a black market where people will work “under the table” for less than the minimum wage

12. Government Influence on Markets Minimum Wage Laws are Unfair Minimum Wage Laws deliver Unfair Results Only those who find a job benefit; unemployment may actually increase. The unemployed end up worse off than if there was no minimum wage law. Discrimination increases when the wage rate does not allocate jobs Minimum Wage Laws impose Unfair Rules blocks voluntary exchange; people willing to work & firms willing to hire, but are legally prevented from doing so

13. Government Influences on Markets Why Minimum Wage There are some beneficiaries. Those who do find jobs are better off Labor unions support minimum wage because it puts upward pressure on all jobs Elasticities of supply and demand may be so low that increased unemployment is not significant

14. Government Influences on Markets The Production Quota Production Quota: An upper limit to the quantity of a good that may be produced in a specified period Example: To improve agricultural commodities pricing, the government may establish programs to reduce the production of crops

15. Government Impact on Markets The Production Quota The impact of a production quota depends upon whether it is set above or below the equilibrium quantity of the market If the quota is set above the equilibrium market quantity, the quota will have no impact If the quota is set below the equilibrium market quantity, the quota will have significant market impact

16. Government Influences on Markets The Production Quota

17. Government Impact on Markets Taxation Issues