107 Putting It Together: Government Action

Summary

This module was an application of the theories of supply and demand. You will notice that once you learn a theory in this course, you will use it over and over again, so the theories are important to learn (click here for a review of theories from the earlier module). The goal of this module was to explore the impacts of government intervention in markets. You learned how to:

• Define and analyze the impacts of price floors like the minimum wage
• Define and analyze the impacts of price ceilings like rent control
• Describe the incidence of various transaction-based taxes, that is, who bears the burden of the tax?
• Identify the types of taxes and the sources of federal income
• Define and analyze the impact of taxes as a percentage of one’s income. In other words, is the burden on the rich, the poor or everyone equally?

Examples

Let’s return to the example of the minimum wage. Careful analysis shows that imposition of, or increases in the minimum wage have significant distributional effects. In other words, there are winners and losers from the policy. The winners are workers who continue to have a job, but are now paid a higher salary. The losers are businesses who have to pay more for their employees. This increase in production costs will be passed on, in part to consumers who will end up paying higher prices for the businesses’ products. So consumers lose also.

The big losers, though, are the people who had jobs at the lower wage, but lose them when the minimum wage is increased. Which employees are most likely to lose their jobs, the most experienced and skilled, or the least experienced and skilled? Don’t forget that ultimately what matters is the size of these effects, which we learned in the last module are based on wage elasticities of supply and demand for labor and the price elasticity of demand for the firm’s products. These are the technical details that policy analysts will look at before making any recommendations to decision makers.