Government Influences on Markets & Taxes

As Governments attempt to maximize welfare of constituents:

Government Influences that can create both inefficiency and unfairness

• Rent Ceilings• Minimum Wage Laws• Production Quotas

Taxation Issues• Impact of sales & excise taxes• Impact of income and social security taxes• Fairness of tax systems

Government Influence on MarketsPrice Ceilings/Rent Ceiling

Price Ceiling – The highest price at which it is legal to trade a particular good, service, or factor of production.

Rent Ceiling – An example of a price ceiling. A government regulation that makes it illegal to charge more than a specified rent for housing.

Government Influence on MarketsRent Ceilings

The impact of a rent depends upon whether it is imposed at a level above or below the equilibrium rent.

Rent ceilings above the equilibrium price have no market impact

Rent ceilings below the equilibrium price have significant market impact

Rent Ceiling Inefficiencies

Government Influence on MarketsImpact of Price Ceilings

Rent Ceilings Below the Equilibrium

1. Create Shortages2. Create Allocation Problems3. Incent Black Market Activity4. Increase the Search Time and Expense for Housing, and5. Oftentimes Cause People to Pay More than if the Market were allowed to operate

Government Influence on MarketsRent Ceilings are Unfair

Rent Ceilings Deliver Unfair Results

Housing Shortages Created – Allocation Schemes – Discrimination/Black

Markets Rent Ceilings Impose Unfair Rules

Block Voluntary Exchange – Rentors want to Rent more Units but are Blocked by Rent Controls

Government Influences on MarketsWhy Rent Controls?

There are beneficiaries – Families that are in units and have been for a period of time

People looking for housing know that it will be cheaper than market if they can find it

Becomes a political issue where oftentimes more people support rent controls than don’t

Government Influences on MarketsPrice Floors; Minimum Wage

Price Floor: The lowest price at which it is legal to trade a particular good, service or factor of production

Minimum Wage: An example of a price floor. A government regulation that makes hiring labor for less than a minimum amount illegal

Government Influences on MarketsMinimum Wages

The impact of a minimum wage law depends upon whether it is imposed above or below the market equilibrium

Minimum Wage levels below the market equilibrium have no impact; the market will bid wages higher than the minimum wage

Minimum Wage levels above the market will have significant market impact

Minimum Wage Inefficiencies

Government Influence on MarketsImpact of Minimum Wage Law

Create Labor Surplus; may hurt the very people it is designed to help!

Forces people to spend more time in job searches; especially for that “better” job

May create a black market where people will work “under the table” for less than the minimum wage

Government Influence on MarketsMinimum Wage Laws are Unfair

Minimum Wage Laws deliver Unfair Results

Only those who find a job benefit; unemployment may actually increase. The unemployed end up worse off than if there was no minimum wage law. Discrimination increases when the wage rate does not allocate jobs

Minimum Wage Laws impose Unfair Rules

blocks voluntary exchange; people willing to work & firms willing to hire, but are legally prevented from doing so

Government Influences on MarketsWhy Minimum Wage

There are some beneficiaries. Those who do find jobs are better off

Labor unions support minimum wage because it puts upward pressure on all jobs

Elasticities of supply and demand may be so low that increased unemployment is not significant

Government Influences on MarketsThe Production Quota

Production Quota: An upper limit to the quantity of a good that may be produced in a specified period

Example: To improve agricultural commodities pricing, the government may establish programs to reduce the production of crops

Government Impact on MarketsThe Production Quota

The impact of a production quota depends upon whether it is set above or below the equilibrium quantity of the market

If the quota is set above the equilibrium market quantity, the quota will have no impact

If the quota is set below the equilibrium market quantity, the quota will have significant market impact

Government Influences on MarketsThe Production Quota

Government Impact on MarketsTaxation Issues