• <b>Federal Trade Commission</b>

Principles of Microeconomics


Government Intervention


The government’s basic function in a market economy is the provision of property rights. Without property rights, a market economy cannot function properly. But governments sometimes intervene for other reasons. In these Pencasts, we explore the effects of price controls and per-unit taxes. Price controls, although not very common today, are used when government officials deem free-market prices to be unfair. Per-unit taxes are often used as a way to raise revenue, which can also be used as an incentive mechanism to deter behaviors deemed undesirable (e.g., smoking, pollution). The Pencasts for this topic illustrate the following: the effects of binding and nonbinding price floors, the effects of binding and nonbinding price ceilings, the effects of prices controls in the short versus long run, how per-unit taxes affect market outcomes, how the relative elasticities of supply and demand determine tax incidence, and how to identify the tax revenue and deadweight loss generated by a per-unit tax.


[Download PDF]

Price Floor

This Pencast defines a price floor; shows when a price floor binds; shows when a price floor does not bind; and illustrates the effect of both binding and nonbinding price floors on the market equilibrium. [Play Pencast]


[Download PDF]

Price Ceiling

This Pencast defines a price ceiling; shows when a price ceiling binds; shows when a price ceiling does not bind; and illustrates the effect of both binding and nonbinding price ceilings on the market equilibrium. [Play Pencast]


[Download PDF]

Application: Rent Control

This Pencast illustrates the effect of rent control, which is a price ceiling, on the market equilibrium in the short and long run. The Pencast incorporates the concept of elasticity, as both supply and demand become relatively more elastic in the long run. [Play Pencast]


[Download PDF]

Per-unit Taxes and Market Outcomes

This Pencast illustrates the effect of a per-unit tax collected from sellers on the market equilibrium. It identifies the price paid by buyers and effective price received by sellers and the new equilibrium quantity that is transacted following the tax. It introduces students the to concept of tax incidence, which describes how the burden of a per-unit tax is distributed between buyers and sellers. [Play Pencast]


[Download PDF]

Relative Elasticities and Tax Incidence

This Pencast shows how a per-unit tax collected from sellers affects the market outcome for two different scenarios, one in which demand is relatively inelastic and supply is relatively elastic and another in which demand is relatively elastic and supply is relatively inelastic. It illustrates how the relative elasticities of supply and demand affect the amount of a tax paid by buyers and sellers. [Play Pencast]


[Download PDF]

Tax Revenue and Deadweight Loss

This Pencast shows students how to identify the tax revenue and deadweight loss generated by a per-unit tax. In the Pencast, a description is provided by what is intuitively meant by deadweight loss. [Play Pencast]


Return to Principles of Microeconomics Home