1. Principles of Marketing
Government Action
Microeconomics
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What is Marketing?
Principles of Marketing

2. Price Controls
Laws that government enacts to regulate prices are called Price Controls. Price controls come in two flavors:
A price ceiling keeps a price from rising above a certain level
A price floor keeps a price from falling below a certain level

3. Example: Rent Control
 A Price Ceiling Example—Rent Control The original intersection of demand and supply occurs at E0. If demand shifts from D0to D1, the new equilibrium would be at E1—unless a price ceiling prevents the price from rising. If the price is not permitted to rise, the quantity supplied remains at 15,000. However, after the change in demand, the quantity demanded rises to 19,000, resulting in a shortage.
Principles of Microeconomics Chapter 3.4. Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

4. Price Ceilings Winners Losers
People able to get the good at the low price who are satisfied with the quality
People unable to get the good because of a shortage Suppliers Quality tends to decline

5. Price Floor
A price floor is the lowest legal price that can be paid in markets for goods and services, labor, or financial capital

6. Price Floor: the Minimum Wage
The minimum wage is based on the normative view that someone working full-time should be able to afford a basic standard of living.
Image from the NYC Rally To Raise The Minimum Wage, by The All Nite Images. Accessed via Flickr, CC-BY-SA.

7. Price Floor: Agricultural Price Supports
The high-income areas of the world, including the United States, Europe, and Japan, are estimated to spend roughly $1 billion per day in supporting their farmers. Farmers (and agribusinesses) will benefit from the price floor, but taxpayers and consumers of food will pay the costs
Principles of Microeconomics Chapter 3.4 and Chapter 3.5. Authored by: OpenStax College. Provided by: Rice University. Located BY: Attribution. License Terms: Download for free at

8. Do Price Controls Change Supply or Demand?
No. They simply set a price that limits what can be legally charged in the market. Changes in price do not cause demand or supply to change. Price ceilings and price floors can cause a different choice of quantity demanded along a demand curve, but they do not move the demand curve. Price controls can cause a different choice of quantity supplied along a supply curve, but they do not shift the supply curve.

9. Tax Incidence
Tax incidence is the effect a particular tax has on the two parties of a transaction; the producer that makes the good and the consumer that buys it. The burden of the tax is not dependent on whether the state collects the revenue from the producer or consumer, but on the price elasticity of supply and the price elasticity of demand.

10. Tax Incidence of Producer
In a scenario with inelastic supply and elastic demand, the tax burden falls disproportionately on suppliers.
Taxation Impact on Economic Output. Provided by: Boundless. Located at:  BY-SA: Attribution-ShareAlike

11. Tax Incidence of Consumer
When supply is elastic and demand is inelastic, the tax incidence falls on the consumer.

12. Shared Tax Burden
Generally consumers and producers are neither perfectly elastic or inelastic, so the tax burden is shared between the two parties in varying proportions. If one party is comparatively more inelastic than the other, they will pay the majority of the tax.

13. Marginal Tax Increases
If the government increases the tax on a good, that shifts the supply curve to the left, the consumer price increases, and sellers’ price decreases. A tax increase does not affect the demand curve, nor does it make supply or demand more or less elastic. This potential increase in tax could be called marginal, because it is a tax in addition to existing levies.

14. Government Revenue The primary source of government revenue is taxes
User fees are levied on consumers of government-provided services (ie. tuition and other fees charged by public universities and colleges entrance fees at national parks)
Government agencies may sell assets or hold bonds on which they earn interest.

15. Two Criteria for Designing a Tax System
The ability of people to pay taxes: As income rises, the doctrine asserts, people are able to pay more for public services; a tax system should therefore be constructed so that taxes rise too. Wealth, the total of assets less liabilities, is sometimes used as well as income as a measure of ability to pay.
The benefits-received principle holds that a tax should be based on the benefits received from the government services funded by the tax

16. Ability to Pay
The ability-to-pay doctrine lies at the heart of tax systems that link taxes paid to income received. The relationship between taxes and income may take one of three forms:
Regressive - takes a higher percentage of income as income falls
Proportional - takes a fixed percentage of income
Progressive - takes a higher percentage of income as income rises

17. Benefits-Received Property taxes User fees
Income taxes may satisfy both benefits received and ability to pay criteria

18. Government Revenue Sources
State, local and U.S. federal revenue sources in billions
Principles of Microeconomics Section 15.2. Authored by: Anonymous. Located at:  BY-NC-SA: Attribution-NonCommercial-ShareAlike

19. Types of Taxes
income taxes – most income taxes in the US are progressive
sales taxes- likely to be regressive
property taxes - imposed on assets, usually considered progressive since wealthier people own more property
excise taxes - imposed on specific items (ie. gasoline, cigarettes, payroll taxes for Medicare and Social Security)

20. Practice Question
In 2007, the payroll tax was 12.4% and was levied on incomes up to $97,500. The Medicare portion of the payroll tax, 2.9%, was levied on all earned wages without limit. Half of the payroll tax is charged to employers, half to employees. The proceeds of this excise on payrolls finance Social Security and Medicare benefits. Almost two- thirds of U. S. households pay more in payroll taxes than in any other taxes.
Are Social Security taxes progressive, regressive, or proportional?
Are Medicare taxes progressive, regressive, or proportional?
1. Regressive since only the first 97,500 dollars of income is taxed. Up to that income they are proportional.
2. Proportional

21. Tax Incidence
Principles of Microeconomics Section 15.2. Authored by: Anonymous. Located at:  BY-NC-SA: Attribution-NonCommercial-ShareAlike

22. Marginal Tax Rate
The marginal tax rate is the tax rate that applies to an additional dollar of income earned.

23. Federal Taxes
Source: Economic Report of the President, Tables B-81 and B-1, in Principles of Macroeconomics Chapter 17.3. Authored by: OpenStax College. Provided by: Rice University. Located BY: Attribution. License Terms: Download for free at

24. State Taxes
(Source: Economic Report of the President, Tables B-85 and B-1, in Principles of Macroeconomics Chapter 17.3. Authored by: OpenStax College. Provided by: Rice University. Located BY: Attribution. License Terms: Download for free at

25. Quick Review
What are the consequences of the government setting a binding price ceiling?
What are the consequences of the government setting a binding price floor?
How does a binding price ceiling or price floor affect the price and quantity of a product sold
How do economists determine the incidence of a tax using the concepts of consumer and producer surplus?
What are progressive, proportional, and regressive taxes?