ECN 104 Lecture Notes - Lecture 5: Tax Incidence, Tax Wedge, Price Ceiling
4 Oct 2017
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Price ceiling- a legal maximum on the price of a good or service ex. Price floor- a legal minimum on the price of a good or service ex. The govt can make buyers or sellers pay a specific amount on each unit bought/sold. Without government intervention the market equilibrium is and 300 qd. If the price ceiling of is introduced what will happen to the supply & demand curve, it will not affect the curve because the act done is legal. However, if there is a introduction of price ceiling of is introduced, the act of chargin is illegal, causing a binding constraint and will cause a change to the demand, supply curve. There will be a shortage and the curve will shift to the left. With a shortage, seller must use ratoining mechanism which include: long lines, discrimination according to seller"s biases. Most of these mechanisms are unfair and inefficient.
