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What is the outcome if supply and demand curves are perfectly elastic in terms of tax burden?
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If supply is perfectly elastic, producers bear no tax burden; if demand is perfectly elastic, consumers bear no tax burden.
How does a price ceiling affect the housing market?
It is intended to make housing more affordable by capping rent prices.
What occurs when a government-mandated quantity control sets the quantity less than the equilibrium quantity?
Underproduction occurs, leading to deadweight loss.
Describe tax incidence and the factors that determine how the tax burden is split.
Tax incidence is how the burden of a tax is distributed between consumers and producers. The split is determined by the relative elasticity of supply and demand.
Why does a price ceiling create a shortage?
Because it sets a maximum price below equilibrium, leading to quantity demanded exceeding quantity supplied.
What must occur for a price floor to cause a surplus?
The price floor must be set above the equilibrium price, causing quantity supplied to exceed quantity demanded.
What is the impact of a subsidy on the supply curve?
A subsidy shifts the supply curve vertically downwards by the amount of the subsidy, leading to overproduction and potential deadweight loss.
Which market participants bear the greater tax burden when demand is perfectly inelastic?
Consumers bear the entire tax burden when demand is perfectly inelastic.
What is the primary purpose of a price floor?
To reduce poverty and provide a living wage for low-skilled workers.
Define price floor and provide an example.
A price floor is the minimum price set by the government for a product, e.g., minimum wage.
What must be true for a price ceiling to be binding?
The price ceiling must be set below the equilibrium price.
Explain the concept of deadweight loss in the context of government controls.
Deadweight loss is the loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved due to government intervention such as price floors, ceilings, taxes, or subsidies.
Explain the purpose of quantity controls in a market.
Quantity controls regulate the specific amounts of production within a market to achieve economic or social objectives.
What happens to consumer surplus when a price floor is removed?
Consumer surplus increases as the price falls to the equilibrium price, and deadweight loss is eliminated.
How does tax affect the supply curve?
A tax shifts the supply curve to the left by the amount of the tax, causing underproduction and deadweight loss.
How is government expenditure on subsidies calculated?
Government expenditure is calculated as the per unit subsidy multiplied by the quantity sold.
What role do subsidies play in market production?
Subsidies incentivize businesses to increase production, leading to overproduction and potential deadweight loss.
How does overproduction resulting from quantity controls affect market efficiency?
It leads to deadweight loss by producing more than the equilibrium quantity, reducing overall economic efficiency.
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