CONTROLS ON PRICES

Criteria Price ceiling Price floor

Denifition a legal maximum on the price at a legal minimum on the price at
which a good can be sold which a good can be sold
Purpose Protect buyers Protect sellers
Non-biding Biding Non-biding Biding
Position of
price
celing/floor
compared
to
equilibrium
price
Change of Qd falls, Qs and Qs and P falls, Qs and P Qd falls, Qs and P
Qd, Qs, P P rises Qd rises falls, Qd rises rises
Impact on No impact Shortage No impact Surplus
the market
outcome
Evaluation
1. Economists usually oppose price ceilings and price floors, because:
- Markets are usually a good way to organize economic activity
- Prices have the crucial job of balancing supply and demand
2. Governments can sometimes improve market outcomes by using
price controls
– Policymakers are motivated to control prices because they view the
market’s outcome as unfair. Besides, price controls are often aimed
at helping the poor.
– Yet price controls often hurt those they are trying to help

TAXES (taxes per unit)

Tax imposed on sellers Tax imposed on buyers
Graphs

Change of equilibrium Equilibrium quantity falls Equilibrium quantity falls

quantity
Buyers pay (PB) More More

Sellers receive (PS) Less Less

Difference between PB PB – PS = tax PB – PS = tax

and PS
 Buyers’ share of tax Less More
burden (Buyers pay
more)
Sellers’ share of tax More Less
burden (Sellers get less)

Conclusion 1 When a good is taxed, buyers and sellers share the

burden of tax
• Sellers get a lower price, are worse off
• Buyers pay a higher price, are worse off
Tax incidence Supply is more price-elastic Demand is more price-
elastic

Conclusion 2 - How exactly the tax burden is divided depends on the

price - elasticity of demand and price - elasticity of supply
- Tax burden falls more heavily on the side of the market
that is less elastic
Evaluation - When the government levies tax on a good, Eq of
the good falls -> shrinks market’s size.
- Tax burden falls more heavily on the side of the
market that is less elastic because it cannot
respond as easily to the tax by changing the
quantity bought or sold.

Slide 143

New equilibrium: Q = 450

Sellers receive: PS = $9
Buyers pay: PB = $12
Difference between them = PB - PS = $12 - $9 = $3 = tax
Slide 144
In our example,
• Buyers pay price more,
• Sellers receive price less.