hi everybody Jacob Reed here from revieweecon.com today we're going to be talking about government controls price floors price ceilings taxes subsidies and quantity controls if after watching this video you still need a little more help head over to revieweecon.com and pick up the total review booklet it has everything you need to know to Ace your microeconomics or macroeconomics exam let's get into the content when governments Implement controls on the economy they are attempting to solve economic problems price floors like minimum wage are attempting to reduce poverty and provide low-skilled workers with a living wage price ceilings like rent control are attempting to make housing more affordable taxes of course provide revenue for the government subsidies can provide incentives to businesses to produce items and The Government Can Implement quantity controls to get a specific amount of production within a market now for this video we are talking about government controls on competitive markets when those competitive markets are at equilibrium they are allocatively efficient and maximize economic surplus and so these government controls are going to create inefficiency and with that deadweight loss now in unit 5 and 6 you're going to learn about government controls that can actually increase efficiency when there's Monopoly power monopsony power or negative or positive externalities and in those cases government intervention can actually increase efficiency and reduce dead weight loss but you'll learn that later first we're going to take a look at quantity controls a quantity control is when the government establishes a specific amount of production within the market here we have a competitive market at equilibrium with the equilibrium price of p e and the equally Rim quantity of QE if the government mandates a quantity here at QC that is less than the equilibrium quantity and the under production within this Market is going to lead to that triangle of deadweight loss that under production within the market creates inefficiency and you can calculate the value of the deadweight loss from the underproduction by calculating the area of that triangle if there were numbers and if the government were to mandate a higher quantity than the equilibrium quantity we would again have deadweight loss this time from overproduction of this product and we would see it in that triangle right there the next type of Regulation we're going to look at is a price floor a price floor is a minimum price for a product it makes it illegal to charge less than a particular price minimum wage is an example of a price floor and it is illegal to charge less than minimum wage for your labor if we were to put it on a graph here is again a competitive market if we have a binding or effective price floor that price floor is going to go above the equilibrium price the market cannot reach the equilibrium price because it is illegal to charge that low of a price as a result the price will be stuck at PF there and at that artificially high price we are going to have a high quantity supplied of Qs and a low quantity demanded of QD since quantity supplied is greater than quantity demanded this government regulation has created a surplus and under normal circumstances prices fall when there's a surplus but since it's illegal for the price to fall the Surplus is going to stay and while Qs is the quantity that producers would like to sell at that high price QD is all that they're going to be able to sell so QD is all that will be sold within this Market because producers can't sell more than consumers are willing to buy at that price and since the quantity sold is less than the equilibrium quantity we have that triangle of deadweight loss as a result our consumer surplus is from the price all the way up to the demand curve that triangle right there and the producer Surplus is found by going from the PF price to the quantity we're getting down below to the supply curve you can calculate the areas of these shapes to find the value of the consumer surplus producer Surplus and deadweight loss if there were numbers of course the elasticity of the supply curve and the demand curve can change the impact of the price floor in these markets if we have an inelastic supply or demand curve then we are going to have a small amount of surplus quantity supplied is still greater than quantity demanded but the amount of the Surplus is much lower than if the demand and supply curve were more elastic in that case the Surplus is much larger so when it comes to minimum wage if the market is perfectly competitive as we see in this graph here and there is a price floor that's going to cause some level of unemployment quantity supplied is the number of workers willing to work at that minimum wage but QD is the number of workers that will be hired by businesses without the minimum wage we would have the equilibrium quantity Where the number of workers hired will equal the number of workers that businesses want to hire but if the demand or supply of labor is inelastic then the amount of the Surplus or unemployed workers will be smaller if the government were to remove a price floor then the price will fall towards equilibrium quantity supplied will decrease quantity demanded will increase and we will reach the equilibrium quantity within the market that will increase consumer surplus and eliminate deadweight loss as this competitive market returns to an efficient outcome now you could see questions on your exam with a price floor that is below equilibrium that is what we call a non-binding or ineffective price floor since the market will seek the equilibrium price the quantity supplied will still equal the quantity demanded and we will get the equilibrium quantity as a result if minimum wage was set at 5 cents an hour not many workers would be willing to work at that five cents an hour and the market wage would seek the equilibrium wage as a result the price floor would be non-binding or ineffective next we're going to talk about price ceilings a price ceiling is similar to a price floor but in this case we are talking about a maximum price for a product it's illegal to charge more than the mandated price in this case when we put it on the competitive market graph the price ceiling will go below equilibrium if it's going to be effective or binding at that artificially low price we are going to have a high quantity demanded and a low quantity supplied since quantity demanded is greater than quantity supplied we have a shortage but since consumers can't buy more than producers are willing to produce Qs is going to be all that is sold within this market so once again this Market is under producing that under production creates this triangle of deadweight loss from the price ceiling to the quantity we're getting in the market up to the demand curve is our consumer surplus and from that price ceiling down to the supply curve is our producer Surplus but economic surplus isn't maximized because there's dead weight loss from under production within this Market if we eliminate that price ceiling the price is going to rise to equilibrium quantity demanded is going to fall and quantity supplied is going to increase at the new equilibrium price the deadweight loss will be eliminated and the market will become socially optimal or allocatively efficient you could also see a non-binding price ceiling on your exam that occurs when the price ceiling is placed above equilibrium since a price ceiling is a maximum price for a product and the equilibrium price is below that point the market is free to find the equilibrium price and so a price ceiling above equilibrium is ineffective or non-binding next we're going to talk about taxes and subsidies subsidies are going to be first a per unit subsidy is a payment to a producer or consumer for a product if the government were to place a per unit subsidy on the production of this good then the suppliers who would be receiving that subsidy and that would shift the supply curve the vertical distance of the subsidy giving us a new supply curve minus the subsidy curve at the new equilibrium we have the quantity after the subsidy and that is the quantity we will get within the market as a result of the subsidy the price that buyers pay is lower than the equilibrium price it's right there at PB and the price that sellers get after the subsidy is that PS there from the supply curve above the new equilibrium PS minus PB is the value of the per unit subsidy multiply that by the quantity sold and that gives us the government expenditure for this subsidy but since this Market is now over producing as a result of the subsidy we have that triangle of deadweight loss from the overproduction the government can also Levy per unit taxes on production or consumption of a particular good for this example we're going to have the producers get the impact of this tax that per unit tax is going to shift the supply curve to the left the vertical distance of that tax giving us a new supply curve plus the tax curve at the new equilibrium we have the quantity we get within this Market as a result of the tax and that QT quantity is the quantity that will be sold within this Market from the tax PS is the price that sellers will get after paying for the tax PB is the amount that buyers pay as a result of the tax and the difference between PB and PS is the value of the per unit tax that rectangle there is the tax revenue that the government brings in for this tax and from the price buyers pay up to the demand curve that's our consumer surplus as a result of the tax from PS down to the supply curve that is our producer Surplus as well and since this Market is now under producing as a result of the tax we have that triangle of deadweight loss as a result the consumer surplus producer Surplus and tax revenue are all economic surplus but the economic surplus is less than it was before the tax because of the deadweight loss resulting from under production within this Market finally we're going to talk about tax incidents or tax burden here we are looking at who pays the tax are consumers burying the burden of the tax or are producers burying the burden of the tax most of the time that burden will be split between the two but how do we find out we are going to take the tax revenue box and divide it from the old equilibrium point the difference between PB and p e is the amount that consumers pay per unit on the tax multiply that by the quantity sold and that gives us the area of that rectangle of buyers loss that is how much of the tax revenue is paid for by consumers and if we take the difference between p e and PS that is the per unit amount that producers are going to pay for this tax multiply that by the quantity after the tax and that gives us that rectangle of seller's loss that's how much of the tax revenue is paid by Sellers as a result of the tax so on this graph while the consumers and producers are both paying some of the tax the buyer's loss is a little bigger than the seller's loss and the reason for the difference in tax burden is because of the price elasticity of the supply and demand curve in this case the demand curve is less elastic at the quantity of the tax and since those consumers are less price sensitive they bear more of the burden of the tax the supply curve on the other hand is more elastic at that quantity and that means the suppliers are more price sensitive so they pay less of the burden of the tax if we flip it around and reverse it now we have the supply curve that is more inelastic and that means producers are less price sensitive and they pay more of the tax burden as a result here the demand curve is less inelastic on the other hand and that means the consumers bear less of the burden of the tax if we go to the extremes and we have one of these curves being perfectly elastic in this case it's the supply curve then that group will pay none of the tax and that's why we see only buyers loss here if we flip it around and make the demand curve the perfectly elastic curve then then they push the entire tax onto producers and we will see only sellers loss as a result because when one curve is perfectly elastic that group pays no tax If instead we have a perfectly inelastic curve the group represented by that curve will pay all of the tax here we have a demand curve that is perfectly inelastic which means that consumers are perfectly insensitive to price changes and that means the consumers are going to Bear all of the burden of the tax as a result if it were the suppliers that had the perfectly inelastic supply curve then it would be sellers that would bear the entire burden of the tax and there you have it that's what you need to know about government controls if you still need more help head over to review econ.com and pick up the total review booklet it has everything you need to know to Ace your microeconomics or macroeconomics exam that's it for now I'll see y'all next time