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Micro: Chapter 7 Price ceilings, price floors and taxes
Terms in this set (34)
Def. price ceiling
is a maximum legal price for an output. It must below the price equilibrium (Shortage)
binding price ceiling when....
it is established below the price equilibrium
What is price ceilings used for?
to protect consumers so they do not have to pay as much for the product.
What is an example of a price ceiling?
rent for apartments (grandfathered in)
What are the consequences of price ceilings?
shortages, long lines, black markets arise bc of shortages
Def. price floors
a minimum legal price for output. It must be set above the price equilibrium to be binding. (surplus)
What are price floors used for?
to protect producers or people supplying something like providing labor
Example of price floors?
What is a surplus of labor?
For price floors and price ceilings, their elasticity determines how much shortage and surplus there is. True or False
The more elastic, the more DWL. (bigger shortage/surplus)
The less elastic, the less DWL. (smaller shortage/surplus)
they are going to create a wedge between price paid and price recieved
Commodity taxes can be: (2)
per unit - tax on each unit and advolaren - % of the price
Def. Statutory Burden
who is required to pay that tax; person responsible for sending tax to the government
Def. Economic Burden
who actually pays the tax in economic terms. free market..
True or False The more inelastic demand, the more consumers will have to bare less.
True or False
If demand is elastic, producers bare more of the burden
split the burden 50/50
Def. Income Tax
average tax rate = income tax paid / total income
What are the 3 ways income tax can work?
Proportional, progressive, regressive
constant average tax rate
the more you make, more you pay. the more income, higher average tax rate
the more you make, the less you pay. More income, less average tax rate.
Formula for marginal tax rate
change in income payments / change in income
The purpose of setting a price ceiling below the equilibrium price is to:
maintain a low price for buyers in the market
The purpose of setting a price floor above the equilibrium price is to:
maintain a high price for sellers in the market
An effective binding price ceiling results in:
a market shortage
An effective binding price floor results in:
a market surplus
The statutory incidence (burden) of a tax refers to:
which party has the legal obligation to send the tax dollars to the governmetn
The economic indidence (burden) of a tax refers to
what percentage of the tax burden falls on buyers and what percentage of the tax burden falls on sellers
If the price of a cup of coffee is $2 in the absence of any tax, and a $0.30 per cup tax is levied on coffee, ceteris paribus, then:
the after-tax price per cup will most likely be between $2.00 and $2.30
If sellers bear the statutory burden of a tax, then they:
may be able to shift some or all of the tax burden to consumers by raising price
A commodity (excise) tax results in a DWL when:
the tax reduces the quantity exchanged in the market to an amount that is less than that for which the marginal benefit to society is equal to the marginal cost to society
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