Market equilibrium: The point where quantity supplied equals quantity demanded, setting the natural market price and quantity.
Price control: Government regulation setting legal maximum or minimum prices in a market.
Price ceiling: A maximum price set below equilibrium, often causing shortages.
Price floor: A minimum price set above equilibrium, potentially leading to surpluses.
Tax incidence: The distribution of the tax burden between buyers and sellers, influenced by elasticities.
Deadweight loss: The welfare loss due to market inefficiencies caused by interventions like taxes or price controls.
1. According to the principles of tax fairness, which of the following best describes vertical equity?
2. How does a tax impact market activity and welfare, and what is a common result called?
3. What is typically a consequence of implementing a price ceiling below the market equilibrium?
What is market equilibrium?
Market equilibrium is the point where the quantity of goods supplied equals the quantity demanded, resulting in a stable price and quantity in the market.
What are price ceilings and their typical effects?
Price ceilings are maximum prices set by the government, usually below the equilibrium price, which can lead to shortages as demand exceeds supply.
How does elasticity influence tax incidence?
Elasticity determines tax burden sharing: the less elastic side of the market bears more of the tax burden, as elastic sides are more responsive and avoid the tax.
Market equilibrium — definition?
Supply equals demand, sets market price.
Price ceiling — effect?
Causes shortages below equilibrium.
Price floor — effect?
Leads to surpluses above equilibrium.
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