September 30, 2022

In Chapter 6 of the textbook, read ‘Why Market Forces Will Overw

In Chapter 6 of the textbook, read "Why Market Forces Will Overwhelm a Higher Minimum Wage" by David Neumark then read the following Forbes' article. While some information in the article is less current such as the anticipated Biden bill which has been outlined, the article provides a comprehensive history about the minimum wage.

After reading both articles, answer the following prompt based on the first letter of your first name. For example, my first name is Tammy and first letter starts with a T; therefore I would answer Prompt 2.

Prompt 1 – Letter A – M

Suppose you are an economist in charge of designing policy to help low-wage workers. Would you prefer a minimum wage or an earned income tax credit? Why?

Prompt 2 – Letter N – Z

Suppose you are a politician running for office. Would it be easier to campaign on a platform of a higher minimum wage or a more generous earned income tax credit? Why?

Also Please add formal reply to these two answer; in two three sentences

Chapter06SupplyDemandandGovernmentPolicies.pptx

Principles of Economics, Ninth Edition N. Gregory Mankiw

PowerPoint Slides prepared by:

V. Andreea CHIRITESCU

Eastern Illinois University

N. Gregory Mankiw Principles Of Economics Ninth Edition

Chapter 6

Supply, Demand, and Government Policies

Controls on Prices, Part 1

Price controls

Policymakers believe that the market price of a good or service is unfair to buyers or sellers

Can generate inequities

Taxes

To raise revenue for public purposes

To influence market outcomes

Controls on Prices, Part 2

Price ceiling

A legal maximum on the price at which a good can be sold

Rent-control laws

Price floor

A legal minimum on the price at which a good can be sold

Minimum wage laws

Controls on Prices, Part 3

How price ceilings affect market outcomes

Not binding

Set above the equilibrium price

No effect on the price or quantity sold

Binding constraint

Set below the equilibrium price: Shortage

Sellers must ration the scarce goods

Rationing mechanisms: long lines, discrimination according to sellers bias

Figure 1 A Market with a Price Ceiling

Lines at the Gas Pump, Part 1

1973, OPEC raised the price of crude oil

Reduced the supply of gasoline

Long lines at gas stations

What was responsible for the long gas lines?

OPEC

Shortage of gasoline

U.S. government regulations

Price ceiling on gasoline

Lines at the Gas Pump, Part 2

Price ceiling on gasoline

Before OPEC raised the price of crude oil

Equilibrium price was below the price ceiling

No effect on the market

When the price of crude oil rose

Decrease in the supply of gasoline

Equilibrium price was above the price ceiling

Binding price ceiling: Severe shortage

Laws regulating the price of gasoline were repealed

Figure 2 The Market for Gasoline with a Price Ceiling

ASK THE EXPERTS, Part 1

Rent Control

“Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.”

Rent Control in the Short Run and the Long Run, Part 1

Price ceiling: rent control

Local government places a ceiling on rents

Goal: to help the poor

Making housing more affordable

Critique

Highly inefficient way to help the poor raise their standard of living

Rent Control in the Short Run and the Long Run, Part 2

Adverse effects in the short run

Supply and demand for housing are inelastic in the short run

Small shortage

Reduced rents

Rent Control in the Short Run and the Long Run, Part 3

Adverse effects in the long run

Supply and demand are more elastic

Landlords

Are not building new apartments

Are failing to maintain existing ones

People

Find their own apartments

Induce more people to move into a city

Large shortage of housing

Rent Control in the Short Run and the Long Run, Part 4

Adverse effects in the long run

Rationing mechanisms

Long waiting lists

Preference to tenants without children

Discriminate on the basis of race

Bribes to building superintendents

People respond to incentives

Free markets

Landlords – clean and safe buildings

Higher prices

Rent Control in the Short Run and the Long Run, Part 5

People respond to incentives

Rent control

Shortages and waiting lists

Landlords lose their incentive to respond to tenants’ concerns

Tenants get lower rents and lower-quality housing

Policymakers – additional regulations

Difficult and costly to enforce

Figure 3 Rent Control in Short Run and in Long Run

Controls on Prices, Part 4

How price floors affect market outcomes

Not binding

Set below the equilibrium price

No effect on the market

Binding constraint

Set above the equilibrium price: Surplus

Some sellers are unable to sell what they want

Rationing mechanisms: not desirable

Figure 4 A Market with a Price Floor

ASK THE EXPERTS, Part 2

The Minimum Wage

“If the federal minimum wage is raised gradually to $15-per-hour by 2020, the employment rate for low-wage U.S. workers will be substantially lower than it would be under the status quo.”

The Minimum Wage, Part 1

Price floor: minimum wage

Lowest price for labor that any employer may pay

Fair Labor Standards Act of 1938

Ensures workers a minimally adequate standard of living

2018, federal minimum wage, $7.25/hour

Some states mandate minimum wages above the federal level

The Minimum Wage, Part 2

France

Average income is 30% lower than in the U.S.

Minimum wage is more than 30% higher

Market for labor

Workers supply labor

Firms demand labor

The Minimum Wage, Part 3

If minimum wage is above equilibrium

Unemployment

Higher income for workers who have jobs

Lower income for workers who cannot find jobs

Impact of the minimum wage on highly skilled and experienced workers

No effect: their equilibrium wages are well above the minimum

Minimum wage: not binding

The Minimum Wage, Part 4

Impact of the minimum wage on teenage labor

Least skilled and least experienced

Low equilibrium wages

Willing to accept a lower wage in exchange for on-the-job training

Minimum wage: binding

The Minimum Wage, Part 5

Teenage labor market

A 10% increase in the minimum wage depresses teenage employment between 1 and 3%

Some teenagers who are still attending high school choose to drop out and take jobs

Displace other teenagers who had already dropped out of school and who now become unemployed

Figure 5 How Minimum Wage Affects Labor Market

The Minimum Wage, Part 6

Advocates of the minimum wage

Raise the income of the working poor

Workers who earn the minimum wage can afford only a meager standard of living

Opponents of the minimum wage

Not the best way to combat poverty

Unemployment, encourages teenagers to drop out of school, prevents some unskilled workers from getting on-the-job training

Poorly targeted policy

Evaluating Price Controls, Part 1

Markets are usually a good way to organize economic activity

Economists usually oppose price ceilings and price floors

Prices are not the outcome of some haphazard process

Prices have the crucial job of balancing supply and demand

Coordinating economic activity

Evaluating Price Controls, Part 2

Governments can sometimes improve market outcomes

Want to use price controls

Because of unfair market outcome

Aimed at helping the poor

Often hurt those they are trying to help

Other ways of helping those in need

Rent subsidies

Wage subsidies (earned income tax credit)

Taxes, Part 1

Government uses taxes

To raise revenue for public projects

Roads, schools, and national defense

Tax incidence

Manner in which the burden of a tax is shared among participants in a market

Taxes, Part 2

How taxes on sellers affect market outcomes

Immediate impact on sellers: shift in supply

Supply curve shifts left

Higher equilibrium price

Lower equilibrium quantity

The tax reduces the size of the market

Figure 6 A Tax on Sellers

Taxes, Part 3

How taxes on sellers affect market outcomes

Taxes discourage market activity

Buyers and sellers share the burden of tax

Buyers pay more, are worse off

Sellers receive less, are worse off

Get the higher price but pay the tax

Overall: effective price fall

Taxes, Part 4

How taxes on buyers affect market outcomes

Initial impact on the demand

Demand curve shifts left

Lower equilibrium price

Lower equilibrium quantity

The tax reduces the size of the market

Figure 7 A Tax on Buyers

Taxes, Part 5

How taxes on buyers affect market outcomes

Buyers and sellers share the burden of tax

Sellers get a lower price, are worse off

Buyers pay a lower market price, are worse off

Effective price (with tax) rises

Taxes, Part 6

Taxes levied on sellers and taxes levied on buyers are equivalent

Wedge between the price that buyers pay and the price that sellers receive

The same, regardless of whether the tax is levied on buyers or sellers

Shifts the relative position of the supply and demand curves

Buyers and sellers share the tax burden

Can Congress Distribute the Burden of a Payroll Tax?, Part 1

Payroll taxes

Deducted from the amount you earned

By law, the tax burden:

Half of the tax is paid by firms

Out of firm’s revenue

Half of the tax is paid by workers

Deducted from workers’ paychecks

Can Congress Distribute the Burden of a Payroll Tax?, Part 2

Tax incidence analysis

Payroll tax as a tax on a good

The good is labor

The price is the wage

Introduce payroll tax

Wage received by workers falls

Wage paid by firms rises

Workers and firms share the tax burden

Not necessarily 50 – 50 as required

Can Congress Distribute the Burden of a Payroll Tax?, Part 3

Lawmakers

Can decide whether a tax comes from the buyer’s pocket or from the seller’s

Cannot legislate the true burden of a tax

Tax incidence

Determined by the forces of supply and demand

Figure 8 A Payroll Tax

Taxes, Part 7

Elasticity and tax incidence

Very elastic supply and relatively inelastic demand

Sellers bear a small burden of tax

Buyers bear most of the burden

Relatively inelastic supply and very elastic demand

Sellers bear most of the tax burden

Buyers bear a small burden

Figure 9 How the Burden of a Tax Is Divided, Part 1

Figure 9 How the Burden of a Tax Is Divided, Part 2

Taxes, Part 8

Tax burden

Falls more heavily on the side of the market that is less elastic

Small elasticity of demand

Buyers do not have good alternatives to consuming this good

Small elasticity of supply

Sellers do not have good alternatives to producing this good

Who Pays the Luxury Tax?, Part 1

1990, Congress adopted a new luxury tax

On yachts, private airplanes, furs, jewelry, expensive cars

Goal: to raise revenue from those who could most easily afford to pay

Luxury items

Demand is quite elastic

Supply is relatively inelastic

Who Pays the Luxury Tax?, Part 2

Outcome:

Burden of a tax falls largely on the suppliers

Relatively inelastic supply

1993: most of the luxury tax was repealed

“If this boat were any more expensive,

we’d be playing golf.”

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