Government Intervention in Markets
Introduced| English | Meaning |
|---|---|
| price ceiling/praɪs ˈsiːlɪŋ/ | A legally imposed maximum price at which a good or service may be sold. |
| binding/ˈbaɪndɪŋ/ | Describing a price control that changes the market outcome: a ceiling below the uncontrolled equilibrium price or a floor above it. |
| price floor/praɪs flɔː/ | A legally imposed minimum price at which a good, service or factor may be traded. |
| deadweight loss/ˈdedweɪt lɒs/ | The loss of total economic surplus when a market produces an inefficient quantity. |
| per-unit tax/pɜː ˈjuːnɪt tæks/ | A tax charged as a fixed amount for each unit of a good or service. |
| tax incidence/tæks ˈɪnsɪdəns/ | The distribution of a tax's economic burden between buyers and sellers, which can differ from who legally pays it. |
When the government sets the price
- Sometimes a government decides the market price is too high or too low.
- So it sets a legal limit, or adds a tax, to change the outcome.
- Each rule moves the market away from its efficient equilibrium.
- And each usually creates a loss that goes to nobody.
A price ceiling causes a shortage
- A price ceiling 价格上限 is a legal maximum price.
- It only bites when set below equilibrium — then it is binding 有约束力.
- At the low legal price, quantity demanded exceeds quantity supplied — a shortage (think rent control).
Set a price control
A price ceiling below equilibrium creates a shortage; a price floor above it creates a surplus. Drag the control and watch the gap and deadweight loss appear.
A price ceiling causes a shortage
A ceiling of 5 dollars, below the equilibrium of 8, gives quantity demanded 130 and quantity supplied 80: a shortage of 50, with only 80 units traded. Switch to a price floor above 8 and the gap becomes a surplus.
A price ceiling only affects the market (is binding) when it is set:
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A ceiling below equilibrium holds the price down and creates a shortage.
Equilibrium is 5 dollars and 100 units. A price ceiling of 3 dollars gives quantity demanded 140 and quantity supplied 70. What is the size of the shortage?
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Shortage = quantity demanded − quantity supplied = 140 − 70 = 70.
A price floor causes a surplus
- A price floor 价格下限 is a legal minimum price.
- It only bites when set above equilibrium.
- At the high legal price, quantity supplied exceeds quantity demanded — a surplus (think a minimum wage or farm price supports).
A binding price floor (like a minimum wage) creates a:
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A floor above equilibrium keeps the price high, so quantity supplied exceeds quantity demanded.
Match each policy to its effect.
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Ceilings cause shortages, floors cause surpluses, and taxes shrink trade with a deadweight loss.
Taxes and deadweight loss
- A per-unit tax 从量税 shifts supply up: buyers pay more, sellers keep less, and the quantity traded shrinks.
- The lost trades create a deadweight loss 无谓损失 — a fall in total surplus that reaches no one.
- Tax incidence 税收归宿: the more inelastic side pays the larger share, because it cannot escape by changing quantity.
A per-unit tax is placed on a good with very inelastic demand. Who bears most of the tax?
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The more inelastic side pays the larger share — here, buyers cannot easily escape.
The loss of total surplus from trades that no longer happen is called ______ loss.
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A deadweight loss is surplus that a binding control or tax destroys.
A price ceiling (below equilibrium) causes a shortage; a price floor (above equilibrium) causes a surplus. A per-unit tax shrinks trade and creates a deadweight loss, and its burden (tax incidence) falls mostly on the more inelastic side.
Write from a shortage of 50
- A ceiling of 5 dollars is below the equilibrium price of 8 dollars.
- Quantity demanded is 130 and quantity supplied is 80.
Equilibrium is 8 dollars and 90 units. A price ceiling of 5 dollars gives quantity demanded 130 and quantity supplied 80. What is the shortage?
130 minus 80 is 50.
How large is the shortage?
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130 minus 80 is 50. Other options — 70 units (the lesson shortage); 90 units (the old equilibrium quantity).