SELECTED ANSWERS:

QUESTIONS ON TAXES AND PRICE CONTROLS

5.
A usury law sets a maximum legal interest rate.  If this maximum legal interest rate is below the equilibrium interest rate, it raises the quantity of loans demanded and reduces the quantity of loans supplied, creating a shortage.  Because the quantity of loans supplied falls, it reduces borrowing and lending.
 
 
 
 
 
 
 
 
 
 
 

6. Assume that the furniture is totally useless to renters.  Then the only reason people rent the furniture is to get the apartment in the presence of a shortage.  In this case, as the graph shows, the rental price of the furniture would be the difference between the maximum legal price for rent and the equilibrium price, or $150.  If rent controls were eliminated, the rental price for furniture would fall to zero.
    Suppose instead that the furniture has some value to people.  For example, suppose it has $20 per month value, so the demand for the furniture is perfectly elastic at a price of $20.  In this case, the rental price of furniture with the price controls on apartments would be $150 + $20 = $170 per month.  If rent controls were eliminated in this case, the rental price for furniture would fall to $20.
 
 
 

10.  No.  Suppose, for example, that the law changes so that buyers (rather than sellers) must send sales taxes to the government every time they buy things.  In this case, prices at stores would change -- prices on price tags would fall by the amount of the tax.  That way, the price buyers pay remains unchanged (they pay less at the store, but they have to send tax money to the government) and the price sellers receive net of tax also remains unchanged (sellers collect less money at the store, but they don't have to send any tax money to the government).  Generally, the point is that the way buyers and sellers share a tax does not depend on whether the government requires buyers or sellers to pay that tax.
 
 

11.

15. True.  The more inelastic demand and supply, the larger the increase in tax payments, and tax revenue to the government, when the tax rate increases.  The reason is that the more inelastic demand and supply, the less the equilibrium quantity falls when the tax rate rises.  As a result, the number of units on which the government collects taxes falls by less.
    Take an extreme case.  When demand is perfectly inelastic, a tax raises the price that buyers pay, including tax, but leaves the quantity bought and sold unchanged.  In that case the government collects more tax revenue per unit without reducing at all the number of units it taxes.  The same applies if supply, rather than demand, is perfectly inelastic.
 
 

19. Buyers gain from the elimination of a tariff because it reduces the price that they pay for the good and increases the amount that they buy. Sellers would lose from the elimination of a tariff because it reduces the price that they receive. Consumer groups might be expected to favor eliminating a tariff, while manufacturers would be expected to oppose it.
 
 

21.  Price controls create shortages and reduce the quantity supplied. A decrease in the quantity of fabric supplied would decrease the supply of clothing, which would actuall raise the prices of clothes.   See Figure 8.4 on page 202.
 
 

24. (a)
The graph shows a the effects of a 50-cent-per-gallon tax on gasoline.  The tax raises the price buyers pay (including tax) to $1.50 per gallon, and lowers the price sellers receive (net of tax) to $1.00. The tax lowers the amount of gasoline sold from Q0 to Q1.  The area of the shaded rectangle shows the revenue the government collects from this tax, which equals 50 cents on each of the Q1 gallons sold.
 
 
 
 
 
 

(b) With perfectly inelastic supply, the tax lowers the price that sellers receive, net of tax, by the full 50 cents, and leaves the price that buyers pay, including tax, unchanged. The tax does not change the equilibrium quantity bought and sold. The area of the shaded rectangle shows total tax payments.
 
 
 
 
 
 
 

(c) With perfectly elastic supply, the tax raises the price that buyers pay by the full 50 cents, while leaving the price that sellers receive unchanged. The equilibrium quantity falls from Qe to Q1. The area of the shaded rectangle shows total tax payments.
 
 
 
 
 
 
 
 
 

25.  If  freshmen were required to give their entire candy bars to the seniors, they would not buy any candy bars.  In other words, if the tax on candy (levied by seniors, rather than the government) were 100%, the equilibrium quantity of candy purchased would be zero.   Seniors can maximize their "revenue" from this "candy tax," by requiring freshmen to give less than 100% of their candy to seniors.
 

A1. Equilibrium occurs when quantity demanded equals quantity supplied.  Quantity demanded depends on the price buyers pay, and quantity supplied depends on the price sellers receive.  So:

or, because the price buyers pay equals the price sellers receive plus the tax,

The equilibrium price buyers pay equals the price sellers receive plus the per-unit tax, so:

To find the equilibrium quantity, substitute the solution for the price buyers pay into the demand curve equation.

OR  substitute the solution for the price sellers receive into the supply curve equation.

Total tax payments equal the per-unit tax times the quantity sold:

A2. (a) Without a tax, set the quantity demanded equal to the quantity supplied:

(b) Follow the same procedures as in problem 8A.1.  So:

A3.  Without a tax or subsidy, the answer is the same as in problem 8A.2.  With a $4 per unit subsidy, the price buyers pay is $4 per unit less than the price sellers recieve.  So, setting quantity demanded equal to quantity supplied, we have: