Effects of government action

This chapter provides the following information in regards to how governments influence the economy. In it, we will look into depth about price ceilings and floors, and how they affect the markets. As well as price supports in agriculture. Then we will look at discussion on taxes, from income tax to fairness and tradeoff. When we reviewed price ceilings, it particularly discussed rent ceilings. Rent ceilings are a regulation that makes it illegal to charge more than a specified rent for housing. So if a rent ceiling was set above the equilibrium price, it wouldn’t do much because people are already paying that price range. But when it is below the equilibrium price, which is when there are very extreme effects. So with a rent ceiling is below, you will begin to have housing shortages, which in turn opens up black markets, and increases search activities. So the question of rent ceiling efficiency is answered, if there were no ceilings, then the market forces would determine its own equilibrium rent, thus the quantity demanded would equal supplied. But with a rent ceiling in place, the outcome would be inefficient as the marginal benefit would exceed marginal cost, and deadweight loss arises. We move on to price floors, where government regulation places a lower limit on which a particular good or service may be traded. Anything lower would be illegal. A good example provided in this chapter is the minimum wage law. The whole aim is to boost the income of low-wage earners, but when the government continues to increase minimum wages, what may end up happening is unemployment, as they regulated how much companies could pay, but not how many workers it must maintain. So for the company to keep its same costs, it must now layoff a certain amount of employees to balance. So there are consequences with this also, which also include increased job search activity, as well as illegal hiring at below the minimum wage rate. We now look at government intervention in the market for farm products. The methods used may vary, but the goals are simple, they are to isolate the domestic market from global competition, introduce a price floor, and pay farmers subsidies. The price support is simple; it’s a price floor maintained by the government guarantying that it will buy any surplus output at that price. But before that can happen, the government restricts imports from the rest of the world, thus isolating the domestic market. So when the government buys the surplus at the market price, it gives the farmer a subsidy, this prevents the farmer from dumping the surplus into the market thus causing the price to fall at which consumers are willing to pay. When we look at taxes, we think of items such as taxes on food we ate at a restaurant, or possibly on gasoline. But when you the price on gasoline, and the tax is already included in the advertised price, you wonder who pays for these taxes? It really just depends, sometimes it is both, or sometimes the burden is shared unequally. On our next section, we went over income tax, and this is dependent on the persons’ taxable income. The marginal tax rate increases with income, and so do the average, however it is less than the marginal rate. Our last area of discussion is the fairness and big trade off. Diving in, the text states that the benefits principle is that people should pay taxes equal to the benefits they receive from public goods and services. But then there is the ability to pay principle, where people should pay taxes according to how easily they can bear the burden. So looking at the big tradeoff, we see that we want a tax system that is efficient and in a sense that in raises the revenue the government needs to provide public goods and services, and a tax system that shares the burden of providing these goods and services. In the end, we went through government actions that included pricing ceilings and floors, price supports in agriculture, as well as taxes for both buyers and sellers.