Government Intervention in Markets
| English | Chinese | Pinyin |
|---|---|---|
| price ceiling | 价格上限 | jià gé shàng xiàn |
| binding | 有约束力 | yǒu yuē shù lì |
| price floor | 价格下限 | jià gé xià xiàn |
| deadweight loss | 无谓损失 | wú wèi sǔn shī |
| per-unit tax | 从量税 | cóng liàng shuì |
| tax incidence | 税收归宿 | shuì shōu guī sù |
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 only affects the market (is binding) when it is set:
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?
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:
A floor above equilibrium keeps the price high, so quantity supplied exceeds quantity demanded.
Match each policy to its effect.
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?
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.
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.