Question

When discussing tax deductions, explain the difference between 'floors' and 'ceilings.' Provide an example of each.

Answer 1

Date frice ceiling It is a legd maximum on the sold. two Ortones are price at which a good can be when a government imposes a price ceiling the morket for ice possible. 192 b) S $4 कर 13 2 0 O Equekin а quantity X Shortage Sчү In ca), the government imposes. a price ceiling of her wre. In this wese, because the price that bolous supply and demand ($30 is below the ceiling the price ceiling is not binding more to the Market forces naturally equilibrium, and price wiling has no effect on the price or quantity sold. In (b) because the devilibrim puce of $3 is above the price ceiling, the ceiling is a binding constraint on the market When the government impones a binding price ceiling a shortage crises, sellers must ration the score goods mag large number of potential buyers.

Date frice floor It is a legal price at which good con egn when a governount imposes on the ice-cream $4 2 price floor has no effect. Inib) the equilibrium price of $3 is below the minimum on the be price floor morbet turo outrones de possible. os 3 frieslar. Earliken quantity Surply of the government imposes a price flow of $2 her when the equilibrium price is $3 In this The equilibrium pasce is above the floor, the not binding. Market forces naturally to the equilibrim and the the price floor is a binding contraint cose :- the conry flar on the morbet. binding price flar cansy a surplus Thus,

Page No. Date When a good is taxed, buzers and sellers of the good shore the burden of the tax. frise byerspy s friebyes friu without ax free without at free sellere frice selles reuve. reuve O (6) In 16) there is elstic supply and relatively inelastic demens. That is, sellers are very responsive to changes in the price of the good wheres benzers ore not very responeve. In 16) there is inlastic supply are very elastic denou When supply is less elastic than cernand the inidine of the tax falls more on heavily con producers then on Congresse more When supply is elastic then denord the inciclene of the thy falls more heavily consumy than on producers. ce particular tax Therefore tay inickna is the effect of distribution of eunomic welfore. on the