Understanding Price Controls & Taxes: Impacts on Markets, Slides of Law

Download Understanding Price Controls & Taxes: Impacts on Markets and more Slides Law in PDF only on Docsity! VIVEKANANDA SCHOOL OF LAW AND LEGAL STUDIES Professional Skill Development Activity 2022-2023 GROUP NO -1 Submitted by : NAMES:- AKSHITA BINJOLA 11717703821 DISHA YADAV 36417703821 MEGHA 11017703821 SHIPRA 12617703821 Submitted To : MR. ROHIT SEHRAWAT SUBJECT : ECONOMICS-1 SEMESTER : 3RD – C COURSE : BA.LLB Controls on Prices Buyers always want lower prices, while sellers want higher prices. Thus, interests of these two groups conflict.   Controls on prices are usually enacted when policymakers believe the market price is unfair to buyers or sellers. For this government creates price ceilings and price floors. Price Ceilings & Price Floors   Price Ceilings o  A legally established maximum price at which a good can be sold.  Price Floors  o Price Floor A legally established minimum price at which a good can be sold. Price Ceilings Price ceiling is the maximum price fixes by Govt. on essential goods in case Equilibrium price is too high for The Common People. Some of the sellers illegally try to sell at higher price than fixed price . This Results in Black Marketing. Since this price is less than Equilibrium price so some of the sellers are not willing to sell their output . This Results in Hoarding. To make these goods available to poors . Govt. can use Rationing.  Gains/Losses is the change in surplus for consumers and producers and is illustrated graphically below. Both consumers and producers lose: it is illustrated by the deadweight loss (LC – loss to consumers; LP – loss to producers).  However, consumers face a net gain because the price ceiling has caused a shift in producer surplus to consumer surplus (illustrated by the green rectangle). Therefore, in our example:  Consumers gain: Consumers lose LC but gain the green rectangle.  Producers lose: Producers lose LP and also lose the green rectangle. How Price Ceilings Affect Market Outcomes:  When govt. imposes price ceiling, following two outcomes are possible:  1. If price is set above the equilibrium price, price ceiling is not binding .   Price ceiling has no effect on the price or quantity sold .  • Therefore, when government imposes a binding price ceiling on a market, shortage of the good arises. 2. If price is set below the equilibrium price, price ceiling is a binding constraint.   The forces of demand and supply move price towards equilibrium price.  But when market price hits the ceiling, it can rise no further.  Thus, market price equals price ceiling.  At this price, quantity demanded exceeds quantity supplied, creating shortage for the good.  2. If price is set above the equilibrium price, price floor is a binding constraint. The forces of demand and supply move price towards equilibrium price.  But when market price hits the floor, it can fall no further.  Thus, market price equals price floor. At this price, quantity supplied exceeds quantity demanded, causing surplus for the good. Govt. purchase this surplus from producers. It will results in buffer stock. The Minimum Wage   An important example of a price floor is the minimum wage. Minimum wage laws dictate the lowest price possible for labor that any employer may pay. A free labor market A labor market with a minimum wage PROS & CONS  Price Ceiling Maximum prices set by government for a particular good/service.  Pros  Affordability  Addresses to a wider section of the society Cons • Lowers the Supply • Creates shortage • Emergence of Black Markets  Price Floors  Minimum prices set by government for a particular good or labor.   Pros  Higher Income for Producers  Higher Income for Labor Cons  Higher Prices for consumers  Encourage oversupply and  In effeciency Higher Unemployment SUMMARY Price controls include price ceilings and price floors.  A price ceiling is a legal maximum on the price of a good or service. An example are crude oil and rental housing. A price floor is a legal minimum on the price of a good or a service. An example is the minimum wage. Taxes are used to raise revenue for public purposes. When the government levies a tax on a good, the equilibrium quantity of the good falls. A tax on a good places a wedge between the price paid by buyers and the price received by sellers. The incidence of a tax refers to who bears the burden of a tax.  The incidence of a tax does not depend on whether the tax is levied on buyers or sellers. The incidence of the tax depends on the price elasticities of supply and demand. Thanking you for your attention