This lesson will apply linear equations to calculate the exact impact of an excise tax on cigarettes, determining the new equilibrium price and quantity, and calculating the amount of tax paid by consumers and by producers.
A worked solution to an IB Economics data response question.
This lesson applies linear equations for demand and supply to our analysis of the effects of price controls. We can determine the precise surplus that will result from a price floor or the shortage that results from a price ceiling by applying the government set prices to the equations for supply and demand.
Before watching this video students should view the lesson that introduces price controls, Determining the Effects of Price Ceilings nad Price Floors.
This video lesson examines the effect of two types of government interventions in the markets for particular goods. Price ceilings and price controls consist of maximum or minimum prices imposed by government, intended to help either the consumers or the producers of particular goods. Like many forms of government intervention, price controls have unintended consequences that usually make them inefficient, and reduce total welfare in affected markets.
In this lesson we will look at two real world examples of price controls: the market for butter in Europe, in which European governments enforce a price floor intended to help butter producers, and the market for petrol in China, in which the Chinese government enforces a price ceilings meant to help consumers. Once you have watched the videos, follow the links below two blog posts about these two examples, and respond to the discussion questions at the end of the posts.
Price controls on the blog:
This lesson explains how to calculate the effects of a per unit subsidy in a commodity market (in this case corn) using linear demand and supply equations. By employing demand and supply equations, we can determine how a per unit subsidy will effect supply, and then we can calculate the new equilibrium price and quantity. To extend our analysis, we can calculate the increase in consumer and producer surplus, the total cost to taxpayers of the subsidy, and thereby the net cost of the subsidy to society as a whole.
This video lesson illustrates and explains the effects that a per unit subsidy will have on the market for a commodity, in this case, corn. The payment to producers from government lowers the marginal cost of production, increases supply and leads to lower prices for consumers and greater revenues for producers. However, subsidies are not always economically efficient, since as we will see, the cost to taxpayers may outweigh the benefit to producers and consumers, meaning a subsidy may result in a net loss of societal welfare.
In this video we examine the effect of an excise tax on a good for which demand is relatively elastic: candy bars. Since candy consumers are responsive to price changes, producers will bear most of the burden of a candy tax. Also, such a tax will be highly ineffective at raising government revenue, and is therefore probably a bad policy.
This video lesson explains how a specific excise tax will affect the equilibrium price and quantity in the market for cigarettes, which is used to represents a good for which demand is relatively inelastic. We will also explain how the tax burden is shared by both producers and consumers, and the portion of the tax born by consumers depends on the elasticity of demand for the product.