If the maximum legal price is above the equilibrium price, it has no direct impact.
 
 
 
 

A maximum legal price on peanuts raises the price of peanut butter.
 
 
 
 

Rent control reduces the number of apartments available and creates a shortage of apartments.  Typically, rationing of apartments occurs through waiting, though sometimes through bribes and tie-ins sales.
 
 
 
 

A maximum legal price on an input raises the price of final goods which use that input in production because  the maximum legal price on the input lowers its production, decreasing the supply of the final good, and raising its price.  See Figure 8.4 on page 202 of the textbook.
 
 
 
 

A minimum legal price lowers output of a good because producers can sell only as many units as people are willing to buy at the minimum legal price.
 
 
 
 
 

If the minimum legal price is below the equilibrium price, it has no direct impact.
 
 
 
 
 
 

The minimum wage is a minimum legal price; it reduces employment (particularly of teenagers).
 
 
 
 
 

  A cup of tea costs $0.99 plus tax.  A buyer pays $1.06 for a cup of tea.  The store keeps $0.99 and sends $.07 to the government.  There is a 7-cents tax wedge between the price buyers pay, $1.06, and the price sellers receive net of tax, 99 cents.
 
 
 
 
 

  In each of the following three cases, the government collects its tax money directly from the seller.
(1) In the United States, sales taxes usually mean that price tags show the price the seller receives, and buyers pay a higher price.  Buyers pay the price on the price tag plus the per-unit sales tax.   (Sellers collect the full price, then send the tax money to the government.)
(2) Sometimes the price on the price tag shows the price the buyer pays, and the seller receives a lower price (net of tax).  For example, when a gas station sells a gallon of gasoline, the price on the gas pump may say $1.39 per gallon.  This is the price the buyer pays.  Because of state and federal excise taxes, the gas station receives a price lower than this.  For example, the gas station may have to send 20 cents in taxes to the government for each gallon sold.  In that case, the price buyers pay is $1.39 but the price sellers receive (net of tax) is only $1.09.  There is a 20-cent tax wedge between the two prices.   (Sellers collect the price on the price tag, and send part of that money to the government as taxes.)
(3) Many countries have value-added taxes rather than sales taxes.  In those cases, the buyer pays the price on the price tag, and the seller receives a lower price (net of tax).  (Sellers collect the price on the price tag, and send part of that money to the government as taxes.)
 
 
 
 

If the government says the seller must pay the tax (that is, must send the tax money to the government), then see these three cases.
 
 
 
 
 

Sometimes, though not often, governments say that buyers must pay a tax (that is, must send tax money to the government).  For example, when a business firm buys labor services from a worker (i.e. employs that worker), both the worker (the seller) and the business firm (the buyer) must pay social security taxes on that trade.
      How does this relate to our graph of taxes?  The answer: When a buyer must send the tax money to the government, the price buyers pay includes that tax money, and the price sellers receive corresponds to the "price tag."
 
 
 
 
 
 

  Copyright, Alan C. Stockman