Chapter

6
conomists have many roles. As scientists, they develop and
test theories to explain the world around them. As policy
analysts and advisers, they try to use these theories to
change the world. The focus of the preceding two chapters has
been scientific. The theory of supply and demand explains the
relationships between the prices of goods and the quantities sold.

Supply, Demand, When various events shift supply and demand, the equilibrium
price and quantity change. The concept of elasticity helps to
gauge the size of these changes. This theory is the foundation for
and Government much of economics.
This chapter is about policy. Here, we analyze several types of

Policies government policy using the tools of supply and demand, with
some surprising insights. Policies often have effects that their archi-
tects did not anticipate.
Efforts to control prices are worthy of close consideration. In
this category, we examine rent-control laws, which set a maximum
fee that landlords may charge tenants, and minimum-wage laws,
which set a pay threshold below which employers must not go.
Policymakers often enact price controls when they believe that the
market price of a good or service is too high or too low. Yet these
policies can generate problems of their own.

ROMAN SAMBORSKYI/[Link], ARNO VAN ENGELAND/EYEEM/GETTY IMAGES

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 112 Part II How Markets Work

After price controls, we consider the impact of taxes. Policymakers use taxes
to raise revenue and to influence market outcomes. The prevalence of taxes in the
economy is obvious, but their effects are not. For example, when the government
levies a tax on the amount that firms pay their workers, do the firms or workers
bear the burden of the tax? The answer is not clear—until we apply the powerful
tools of supply and demand.

6-1 The Surprising Effects of Price Controls

To see how price controls affect market outcomes, let’s return to the market for
ice cream. As we saw in Chapter 4, if ice cream is sold in a competitive market,
the price normally adjusts to balance supply and demand: At the equilibrium
price, the quantity of ice cream that buyers want to buy exactly equals the quan-
tity that sellers want to sell. To be concrete, suppose that the equilibrium price
is $3 per cone.
Some people may not like this outcome. The American Association of Ice-Cream
Eaters complains that the $3 price is too high for everyone to enjoy a cone a day
(their recommended daily allowance). Meanwhile, the National Organization of
Ice-Cream Makers complains that the $3 price—the result of “cutthroat competition”—is
so low that it is depressing the incomes of its members. Each group lobbies the
government to alter the market outcome by passing laws that control the price of
an ice-cream cone.
Because buyers usually want a lower price while sellers want a higher one,
the interests of the two groups conflict. If the Ice-Cream Eaters are successful in
their lobbying, the government imposes a legal maximum on the price at which
ice-cream cones can be sold. Because the price is not allowed to rise above this
price ceiling level, the legislated maximum is called a price ceiling. By contrast, if the Ice-
a legal maximum on the Cream Makers are successful, the government imposes a legal minimum on the
price at which a good price. Because the price cannot fall below this level, the legislated minimum is
can be sold called a price floor.
price floor
a legal minimum on the 6-1a How Price Ceilings Affect Market Outcomes
price at which a good When the government, moved by the complaints and campaign contributions
can be sold of the Ice-Cream Eaters, imposes a price ceiling in the market for ice cream, two
outcomes are possible. In panel (a) of Figure 1, the government imposes a price
ceiling of $4 per cone. In this case, because the price that balances supply and
demand ($3) is below the ceiling, the price ceiling is not binding. Market forces
move the economy to the equilibrium, and the ceiling has no effect on the price
or on the quantity sold.
Panel (b) of Figure 1 shows another, more interesting possibility. In this case, the
government imposes a price ceiling of $2 per cone. Because the equilibrium price of
$3 is above the price ceiling, the ceiling is a binding constraint on the market. The
forces of supply and demand tend to move the price toward equilibrium, but the
ceiling prevents the market price from reaching it. Instead, the market price must
be the price ceiling. At this price, the quantity of ice cream demanded (125 cones
in the figure) exceeds the quantity supplied (75 cones). With excess demand of
50 cones, some people who want ice cream at the going price can’t buy it. The price
ceiling has created an ice-cream shortage.

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 Chapter 6 Supply, Demand, and Government Policies 113

Figure 1 In panel (a), the government imposes a price ceiling of $4. Because it is above the
equilibrium price of $3, the ceiling has no effect, and the market can reach the
A Market with a Price Ceiling equilibrium of supply and demand. At this point, quantity supplied and quantity
demanded both equal 100 cones. In panel (b), the government imposes a price ceiling of
$2. Because the ceiling is below the equilibrium price of $3, the market price is $2. At
this price, 125 cones are demanded while only 75 are supplied, so there is a shortage of
50 cones.

(a) A Price Ceiling That Is Not Binding (b) A Price Ceiling That Is Binding

Price of Price of
Ice-Cream Ice-Cream
Cone Cone
Supply Supply

Equilibrium
$4 Price price
ceiling
3 $3
Equilibrium
price 2 Price
Shortage ceiling

Demand Demand

0 100 Quantity of 0 75 125 Quantity of

Equilibrium Ice-Cream Quantity Quantity Ice-Cream
quantity Cones supplied demanded Cones

In response to the shortage, a mechanism for rationing ice cream will naturally
develop. It could be long lines: Buyers who arrive early and wait in line (or pay
others to do so) get a cone, while those who can’t or won’t do this must go without.
Another possibility is that sellers ration ice-cream cones according to their own
personal biases, selling only to friends, relatives, members of their own racial or
ethnic group, or those who provide favors in return. Clearly, even though the price
ceiling was intended to help buyers of ice cream, not all buyers benefit from the
policy. Some buyers pay a lower price, though they may have to wait in line to do
so, but others cannot get any ice cream at all.
This illustrates a general result: When the government imposes a binding price
ceiling on a competitive market, a shortage arises, and sellers must ration scarce
goods among potential buyers. The rationing mechanisms that develop under price
ceilings are rarely desirable. Long lines are inefficient because they waste buyers’
time. Relying on the biases of sellers is both inefficient (because the good may not
go to the buyer who values it most) and unfair. By contrast, the rationing mecha-
nism in a free, competitive market is straightforward. When the market reaches its
equilibrium, anyone who wants to pay the market price can buy the good. This may
seem unfair to some buyers when prices are high, but it is efficient and impersonal.
You don’t need to be the ice-cream maker’s friend or relative to buy a cone. You just
need to be able and willing to pay $3.

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 114 Part II How Markets Work

How to Create Long Lines at the Gas Pump

Case
Study Chapter 5 discussed how, in 1973, the Organization of Petroleum
Exporting Countries (OPEC) reduced production of crude oil and
increased its price. Because crude oil is used to make gasoline, the
higher oil prices reduced the supply of gasoline. Long lines at gas stations became
common, with motorists often waiting for hours to buy a few gallons of gas.
What caused the long gas lines? Most people blamed OPEC. To be sure, if it
had not reduced production of crude oil, the gasoline shortage would not have
occurred. Yet economists found another culprit: U.S. government regulations that
set a ceiling on the price of gasoline.
Figure 2 reveals what happened. As panel (a) shows, before OPEC raised the
price of crude oil, the equilibrium price of gasoline, P1, was below the price ceiling.
The price regulation, therefore, had no effect. When the price of crude oil rose, how-
ever, the situation changed. The increase in the price of crude oil raised the cost of
producing gasoline and thereby reduced the supply of gasoline. As panel (b) shows,
the supply curve shifted to the left from S1 to S2. In an unregulated market, this shift
in supply would have raised the equilibrium price of gasoline from P1 to P2, and no
shortage would have occurred. Instead, the price ceiling prevented the price from
rising to the equilibrium level. At the price ceiling, producers were willing to sell
QS, but consumers were willing to buy QD. The supply shift caused a severe short-
age at the regulated price.

Figure 2 Panel (a) shows the gasoline market when the price ceiling is not binding because the
equilibrium price, P1, is below the ceiling. Panel (b) shows the gasoline market after an
The Market for Gasoline with increase in the price of crude oil (an input into making gasoline) shifts the supply curve
a Price Ceiling to the left from S1 to S2. In an unregulated market, the price would have risen from P1 to
P2. The price ceiling, however, prevents this from happening. At the binding price ceiling,
consumers are willing to buy QD, but producers of gasoline are willing to sell only QS.
The difference between quantity demanded and quantity supplied, QD 2QS, measures the
gasoline shortage.

(a) The Price Ceiling on Gasoline Is Not Binding (b) The Price Ceiling on Gasoline Is Binding

Price of Price of S2
Gasoline Gasoline 2. . . . but when
supply falls . . .

Supply, S1 S1
1. Initially, P2
the price
ceiling
is not
binding . . . Price ceiling Price ceiling

P1 P1 3. . . . the price
4. . . . ceiling becomes
resulting binding . . .
in a
Demand shortage. Demand
0 Q1 Quantity of 0 QS QD Q1 Quantity of
Gasoline Gasoline

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 Chapter 6 Supply, Demand, and Government Policies 115

Eventually, the laws regulating the price of gasoline were repealed. Lawmakers
came to understand that they were partly responsible for the many hours
Americans lost waiting in line to buy gasoline. Today, when the price of crude
oil changes, the price of gasoline adjusts freely to bring supply and demand into
equilibrium. ●

Why Rent Control Causes Housing Shortages,

Case Especially in the Long Run
Study
In many cities, the local government places a ceiling on rents that
landlords may charge their tenants. This is rent control, a policy
aimed at helping the poor by keeping housing costs low. Yet economists often
criticize rent control, saying that it is a highly inefficient way to help the poor. One
economist went so far as to call rent control “the best way to destroy a city, other
than bombing.”
The adverse effects of rent control may not be apparent because these effects
occur over many years. In the short run, landlords have a fixed number of apart-
ments to rent, and they cannot adjust this number quickly as market conditions
change. Moreover, the number of people looking for apartments may not be highly
responsive to rents in the short run because people take time to adjust their housing
arrangements. In other words, the short-run supply and demand for housing are
both relatively inelastic.
Panel (a) of Figure 3 shows the short-run effects of rent control on the hous-
ing market. As with any binding price ceiling, rent control causes a shortage. But

Figure 3 Panel (a) shows the short-run effects of rent control: Because the supply and demand
curves for apartments are relatively inelastic, the price ceiling imposed by a rent-control law
Rent Control in the Short causes only a small shortage of housing. Panel (b) shows the long-run effects of rent control:
Run and in the Long Run Because the supply and demand curves for apartments are more elastic, rent control causes
a larger shortage.

(a) Rent Control in the Short Run (b) Rent Control in the Long Run
(supply and demand are inelastic) (supply and demand are elastic)
Rental Rental
Price of Price of
Apartment Supply Apartment

Supply

Controlled rent Controlled rent

Shortage Demand
Shortage
Demand

0 Quantity of 0 Quantity of
Apartments Apartments

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 116 Part II How Markets Work

because supply and demand are inelastic in the short run, the initial shortage is
small. The primary result in the short run is popular among tenants: a reduction in
rents.
The long-run story is very different because the buyers and sellers of rental
housing respond more to market conditions as time passes. On the supply side,
landlords respond to low rents by not building new apartments and by failing to
maintain existing ones. On the demand side, low rents encourage people to find
their own apartments (rather than live with roommates or their parents) and to
move into the city. Therefore, both supply and demand are more elastic in the
long run.
Panel (b) of Figure 3 illustrates the housing market in the long run. When rent
control depresses rents below the equilibrium level, the quantity of apartments
supplied falls substantially, and the quantity of apartments demanded rises sub-
stantially. The result is a large shortage of housing.
In cities with rent control, landlords and building superintendents use vari-
ous mechanisms to ration housing. Some keep long waiting lists. Others give
preference to tenants without children. Still others discriminate based on race.
Sometimes, apartments are allocated to those willing to offer under-the-table
payments; these bribes bring the total price of an apartment closer to the equi-
librium price.
Recall one of the Ten Principles of Economics from Chapter 1: People respond
to incentives. In well-functioning markets, landlords can command higher prices
if they keep their buildings clean and safe. But when rent control creates shortages
and waiting lists, landlords lose that incentive. Why spend money to maintain
and improve the property when people are waiting to move in as it is? In the end,
rent control reduces what tenants have to pay, but it also lowers the quantity and
quality of a city’s housing stock.
When these adverse effects become evident, policymakers often react by
imposing additional regulations. For example, various laws make racial dis-
crimination in housing illegal and require landlords to provide minimally
adequate living conditions. These laws, however, are difficult
and costly to enforce. By contrast, without rent control, such
Ask the laws are less necessary because the market for housing is
Experts Rent Control regulated by the forces of competition. If the price of housing
were permitted to increase to the equilibrium level, the short-
ages that give rise to undesirable landlord behavior would be
“Local ordinances that limit rent increases for some rental largely eliminated. ●
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 6-1b How Price Floors Affect Market
cities that have used them.” Outcomes
What do economists say? To examine the effects of another kind of government price
control, let’s return to the market for ice cream. Imagine now
4% uncertain 1% agree
that the National Organization of Ice-Cream Makers persuades
the government that the $3 equilibrium price is too low. In this
case, the government might institute a price floor. Price floors,
95% disagree like price ceilings, are an attempt by the government to maintain
prices at other than equilibrium levels. While a price ceiling
places a legal maximum on prices, a price floor places a legal
Source: IGM Economic Experts Panel, February 7, 2012.
minimum.

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 Chapter 6 Supply, Demand, and Government Policies 117

When the government imposes a price floor on ice cream, two outcomes are
possible. If the floor is $2 per cone but the equilibrium price is $3, nothing hap-
pens. Because the equilibrium price is above the floor, the price floor is not bind-
ing. Market forces move the economy to the equilibrium, and the price floor has
no effect. Panel (a) of Figure 4 shows this outcome.
Panel (b) of Figure 4 shows what happens when the government imposes a
price floor of $4 per cone, which is higher than the equilibrium price of $3. In this
case, the price floor is a binding constraint on the market. The forces of supply
and demand tend to move the price toward the equilibrium price, but the price
can’t go below the floor. As a result, the price floor becomes the market price. At
this level, the quantity of ice cream supplied (120 cones) exceeds the quantity
demanded (80 cones). There is an excess supply of 40 cones. In other words, some
people who want to sell ice cream at the going price have no buyers: A binding
price floor causes a surplus.
Just as shortages caused by price ceilings can lead to undesirable rationing mecha-
nisms, so can the surpluses resulting from price floors. The sellers who appeal to
the buyers’ personal biases may be better able to sell their goods than those who
do not. By contrast, in a free market, the price is the rationing mechanism. Sellers
may not be happy about how much they are paid at the equilibrium price, but they
can sell all they want.

Figure 4 In panel (a), the government imposes a price floor of $2. Because it is below the
equilibrium price of $3, the floor has no effect, and the market can reach the equilibrium
A Market with a Price Floor of supply and demand. At this point, quantity supplied and demanded both equal
100 cones. In panel (b), the government imposes a price floor of $4. Because the floor
is above the equilibrium price of $3, the market price is $4. At this price, 120 cones
are supplied while only 80 are demanded, so there is a surplus of 40 cones.

(a) A Price Floor That Is Not Binding (b) A Price Floor That Is Binding

Price of Price of
Ice-Cream Ice-Cream
Cone Supply Cone Supply

Surplus
Equilibrium
price $4
Price
floor
$3 3
Price
floor
2 Equilibrium
price

Demand Demand

0 100 Quantity of 0 80 120 Quantity of

Equilibrium Ice-Cream Quantity Quantity Ice-Cream
quantity Cones demanded supplied Cones

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 118 Part II How Markets Work

Controversies over the Minimum Wage

Case
Study The minimum wage is an important and contentious example of a
price floor. Minimum-wage laws set the lowest price for labor that
any employer may pay. The U.S. Congress first instituted a minimum
wage with the Fair Labor Standards Act of 1938 to ensure workers a minimally
adequate standard of living.
In 2021, the minimum wage according to federal law was $7.25 per hour. In
addition, many states and cities mandate minimum wages above the federal level.
The minimum wage in Seattle, for instance, was $16.69 per hour for large employ-
ers in 2021. Most European nations also have laws that establish a minimum wage,
often much higher than in the United States. For example, even though the aver-
age income in France is almost 30 percent lower than it is in the United States, the
French minimum wage is more than 50 percent higher.
To see what the theory of supply and demand predicts for the effects of a mini-
mum wage, consider the market for labor. Panel (a) of Figure 5 shows a competitive
labor market, which, like all competitive markets, is subject to the forces of supply
and demand. Workers supply labor, and firms demand labor. If the government
doesn’t intervene, the wage adjusts to balance labor supply and labor demand.
Panel (b) of Figure 5 shows the labor market with a minimum wage. If the
minimum wage is above the equilibrium level, as it is here, the quantity of labor
supplied exceeds the quantity demanded. The result is a surplus of labor, or unem-
ployment. While the minimum wage raises the incomes of those workers who have
jobs, it lowers the incomes of would-be workers who now cannot find jobs.

Figure 5 Panel (a) shows a labor market in which the wage adjusts to balance labor supply and labor
demand. Panel (b) shows the impact of a binding minimum wage. Because the minimum
How the Minimum Wage Affects wage is a price floor, it causes a surplus: The quantity of labor supplied exceeds the
a Competitive Labor Market quantity demanded. The result is unemployment.

(a) A Free Labor Market (b) A Labor Market with a Binding Minimum Wage

Wage Wage

Labor Labor
supply supply
Labor surplus
(unemployment)
Minimum
wage

Equilibrium
wage

Labor Labor
demand demand
0 Equilibrium Quantity of 0 Quantity Quantity Quantity of
employment Labor demanded supplied Labor

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 Chapter 6 Supply, Demand, and Government Policies 119

To fully understand the minimum wage, keep in mind that the economy
contains not a single labor market but many labor markets for different types of
workers. The impact of the minimum wage depends on the skill and experience of
the worker. Highly skilled and experienced workers are not affected because their
equilibrium wages are well above the minimum. For these workers, the minimum
wage is not binding.
The minimum wage has its greatest impact on the market for teenage labor.
The equilibrium wages of teenagers are low because teenagers are among the least
skilled and least experienced members of the labor force. In addition, teenagers
are often willing to accept a lower wage in exchange for on-the-job training. (Some
teenagers are willing to work as interns for no pay at all. Because many intern-
ships pay nothing, minimum-wage laws often do not apply to them. If they did,
some of these internship opportunities might not exist.) As a result, the minimum
wage is binding more often for teenagers than for other members of the labor
force.
Many economists have studied how minimum-wage laws affect the teenage
labor market. These researchers compare the changes in the minimum wage over
time with the changes in teenage employment. Although there is some debate
about the effects of minimum wages, the typical study finds that a 10 percent
increase in the minimum wage depresses teenage employment by 1 to 3 percent.
One drawback of most minimum-wage studies is that they focus on the effects
over short periods. For example, they might compare employment the year before
and the year after a change in the minimum wage. The longer-term effects on
employment are harder to estimate reliably, but they are more relevant for evaluat-
ing the policy. Because it takes time for firms to reorganize the workplace, the long-
run decline in employment from a higher minimum wage may be larger than the
estimated short-run decline.
In addition to altering the quantity of labor demanded, the minimum wage
alters the quantity supplied. Because the minimum wage raises the wage that
teenagers can earn, it increases the number of teenagers who choose to look for
jobs. Some studies have found that a higher minimum wage also influences which
teenagers are employed. When the minimum wage rises, some teenagers who are
still attending high school choose to drop out and take jobs. With more people
vying for the available jobs, some of these new dropouts displace other teenagers
who had already dropped out of school, and these displaced teenagers become
unemployed.
The minimum wage is a frequent topic of debate. Advocates of a higher mini-
mum wage view the policy as a humane way to raise the income of the working
poor. They correctly point out that workers who earn the minimum wage can afford
only a meager standard of living. In 2021, for instance, when the minimum wage
was $7.25 per hour, two adults working 40 hours a week for every week of the year
at minimum-wage jobs had a joint annual income of only $30,160. This amount
was only about 40 percent of the median family income in the United States. Some
proponents of a higher minimum wage contend that labor markets are not well
explained using the theory of supply and demand in competitive markets, so they
doubt the theory’s predictions regarding unemployment. Others acknowledge
that the policy has some adverse effects, including job loss, but say these effects
are small and that, all things considered, a higher minimum wage makes the poor
better off.
Opponents of raising the minimum wage contend that it is not the best way
to combat poverty. They say that a high minimum wage causes unemployment,

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 120 Part II How Markets Work

encourages teenagers to drop out of school, and results in some

Ask the The Minimum unskilled workers not getting on-the-job training. Moreover,
Experts Wage opponents of raising the minimum wage note that it is a poorly
targeted policy. Less than a third of minimum-wage earners
are in families with incomes below the poverty line. Many are
“The current US federal minimum wage is $7.25 per hour. teenagers from middle-class homes working at part-time jobs for
States can choose whether to have a higher minimum—and extra spending money.
many do. A federal minimum wage of $15 per hour would lower In 2021, President Biden proposed increasing the minimum
employment for low-wage workers in many states.” wage to $15 per hour by 2025. “No one should work 40 hours
What do economists say? a week and live in poverty,” he said. In February 2021, the
Congressional Budget Office, a government agency staffed
34% uncertain
by nonpartisan policy analysts, released a study of the pro-
16% disagree posal. They estimated that it would increase the wages of 17
million people, lift 900,000 out of poverty, and put 1.4 million
50% agree out of work. As this book went to press, Congress had not yet
enacted the Biden proposal. ●
Source: IGM Economic Experts Panel, February 2, 2021.

6-1c Evaluating Price Controls

One of the Ten Principles of Economics in Chapter 1 is that markets are usually a
good way to organize economic activity. It is why economists often oppose price
ceilings and price floors. To economists, prices are not the outcome of some hap-
hazard process. Prices, they say, are the result of millions of business and consumer
decisions that lie behind the supply and demand curves. Prices have the crucial
job of balancing supply and demand and, thereby, coordinating economic activity.
Government price-setting obscures the signals that would otherwise guide the
allocation of society’s resources.
That’s just one side of the story. Another of the Ten Principles of Economics is
that governments can sometimes improve market outcomes. Indeed, policymakers
are often motivated to control prices because they view the market’s outcome as
unfair. Price controls are frequently aimed at helping the poor. For instance, rent-
control laws try to make housing affordable for everyone, and minimum-wage laws
try to help people escape poverty.
Yet price controls can hurt some people they are intended to help. Rent control
keeps rents low, but it also discourages landlords from maintaining their buildings
and makes housing hard to find. Minimum-wage laws raise the incomes of some
workers, but they can also lead to job losses for others.
Helping those in need can be accomplished in ways other than controlling
prices. For instance, the government can make housing more affordable by paying
a fraction of the rent for poor families or by giving them cash transfers so they
can pay the rent themselves. Unlike rent control, such subsidies do not reduce
the quantity of housing supplied and, therefore, do not lead to housing short-
ages. Similarly, wage subsidies raise the living standards of the working poor
without discouraging firms from hiring them. An example of a wage subsidy
is the earned income tax credit, a government program that supplements the
incomes of low-wage workers.
These alternative policies are often better than price controls, but they are not
perfect. Applying for rent or wage subsidies can be a burden for poor people. In
addition, rent and wage subsidies cost the government money and, therefore, require
higher taxes. As the next section shows, taxation has costs of its own.

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 Chapter 6 Supply, Demand, and Government Policies 121

QuickQuiz
1. When the government imposes a binding price floor, 3. Rent control causes larger shortages in the ________
it causes run because over that time horizon, supply and
a. the supply curve to shift to the left. demand are ________ elastic.
b. the demand curve to shift to the right. a. long; more
c. a shortage of the good to develop. b. long; less
d. a surplus of the good to develop. c. short; more
2. In a market with a binding price ceiling, increasing d. short; less
the ceiling price will 4. An increase in the minimum wage reduces the total
a. increase the surplus. amount paid to the affected workers if the price elas-
b. increase the shortage. ticity of ________ is ________ than one.
c. decrease the surplus. a. supply; greater
d. decrease the shortage. b. supply; less
c. demand; greater
d. demand; less
Answers are at the end of the chapter.

6-2 The Surprising Study of Tax Incidence

All governments—from national governments around the world to local govern-
ments in small towns—use taxes to raise revenue for public projects, such as roads,
schools, and national defense. Because taxes are such an important policy instrument
and affect our lives in many ways, they appear throughout this book. This section
begins our study of how taxes affect the economy.
To set the stage for the analysis, imagine that a local government decides to hold
an annual ice-cream celebration—with a parade, fireworks, and speeches by town
bigwigs. To raise revenue for the event, the town will place a $0.50 tax on each sale
of an ice-cream cone. When the plan is announced, our two lobbying groups swing
into action. The American Association of Ice-Cream Eaters claims that consumers
of ice cream are having trouble making ends meet, and it argues that sellers of ice
cream should pay the tax. The National Organization of Ice-Cream Makers claims
that its members are struggling to survive in a competitive market, and it argues
that buyers of ice cream should pay the tax. The mayor, hoping for a compromise,
suggests that buyers and sellers each pay half the tax.
To assess the proposals, ask a simple but subtle question: When the government
levies a tax on a good, who actually bears the burden of the tax? The people buy-
ing the good? The people selling it? Or, if buyers and sellers share the tax burden,
what determines how it is divided? Can the government make that decision, as the
mayor suggests, or do market forces intervene? These issues involve tax incidence, tax incidence
the study of how the burden of a tax is distributed among the various people in the manner in which
the economy. The tools of supply and demand will reveal some surprising lessons the burden of a tax is
about tax incidence. shared among partici-
pants in a market
6-2a How Taxes on Sellers Affect Market Outcomes
Let’s begin with a tax levied on sellers. Suppose sellers of ice-cream cones are
required to send the local government $0.50 for every cone they sell. How does
this law affect the buyers and sellers of ice cream? To answer this question, follow
the three steps in Chapter 4 for analyzing supply and demand: (1) Decide whether

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 122 Part II How Markets Work

In the Should the Minimum Wage Be $15 an Hour?

News
earners most directly affected by raising the To provide an accurate reading of the
minimum wage. research, Peter Shirley and I surveyed the
In 2021, President Biden proposed There are conflicting individual studies of authors of nearly all U.S. studies estimating
a minimum wage of $15 an hour, an the effects of minimum wages on employment. the effects of minimum wages on employment
idea that was controversial among That there is disagreement shouldn’t be sur- published in the past 30 years. We asked them
both politicians and economists. prising. Economics is a social science, not a to report to us their best estimate of the employ-
natural one. Studies of minimum wages and ment effect, measured as the “elasticity,” or
Raising the Minimum Wage job loss are not laboratory experiments. They the percent change in employment for each
Will Definitely Cost Jobs can’t be replicated and so can’t be expected 1-percent change in the minimum wage. Most
to yield exactly the same results. authors responded, and in the few cases in
By David Neumark
What’s surprising, though, is that sum- which they did not, we pulled this estimate

A recent Congressional Budget Office report

estimated that 1.4 million jobs would be
lost if a new $15 federal minimum wage is
maries of the research literature make contra-
dictory claims about what the overall body of
evidence says. Distinguished economists like
from their study.
The results are stark. Across all studies,
79 percent report that minimum wages reduced
signed into law. Advocates were quick to dis- Angus Deaton and Peter Diamond signed the employment. In 46 percent of studies the
miss the CBO’s conclusion. “It is not a stretch to EPI letter asserting that the research shows negative effect was statistically significant.
say that a new consensus has emerged among little or no evidence of job loss, whereas oth- In contrast, only 21 percent of studies found
economists that minimum wage increases ers look at the research and conclude that small positive effects of minimum wages on
have raised wages without substantial job it points to job loss. How can that be? Who employment, and in only a minuscule percent-
loss,” said Heidi Shierholz of the Economic is right? age (4 percent) was the evidence statistically
Policy Institute, which has also circulated a Most economists have a strong stance significant. A simplistic but useful calculation
letter signed by economics Nobel laureates and on the minimum wage one way or the other. shows that the odds of nearly 80 percent of
others making the same claim. Perhaps this colors how they look at and studies finding negative employment effects
As I show in a recent extensive survey of interpret the evidence. Or perhaps there are if the true effect is zero is less than one in
research on minimum wages and job loss in so many studies of the employment effects a million.
the U.S., this is simply not true. Most studies of minimum wages that it is difficult to keep Across all the studies, the average
find that a minimum wage reduces employment a “scorecard” of what the overall body of employment elasticity is about minus 0.15,
of low-skilled workers, especially the lowest evidence says. which means, for example, that a 10-percent

the law affects the supply curve or the demand curve. (2) Decide which way the
curve shifts. (3) Examine how the shift affects the equilibrium price and quantity.

Step One The immediate impact of the tax is on the sellers. Because the tax is not
imposed on buyers, the quantity demanded at any price remains the same; thus, the
demand curve does not change. By contrast, the tax on sellers makes the ice-cream
business less profitable at any price, so it shifts the supply curve.

Step Two Because the tax on sellers raises the cost of producing and selling ice
cream, it reduces the quantity supplied at every price. The supply curve shifts to
the left (or, equivalently, upward).
Let’s be precise about the size of the shift. For any market price of ice cream, the
effective price to sellers—the amount they keep after paying the tax—is $0.50 lower.
For example, if the market price of a cone happened to be $2.00, the effective price
received by sellers would be $1.50. Whatever the market price, the effective price

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 Chapter 6 Supply, Demand, and Government Policies 123

increase in the minimum wage reduces with at most a

employment of the low-skilled by 1.5 percent. high school edu-
Extrapolating this to a $15 minimum wage, cation is minus
this 107-percent increase in the states where 0.24, implying
the federal minimum wage of $7.25 now pre- that a 10-percent
vails would imply a 16-percent decline in low- increase in the
skilled employment (broadly consistent with minimum wage
the recent CBO study). That sounds like a reduces their
substantial job loss. employment by

AP IMAGES/LYNNE SLADKY
It’s true that some workers would expe- 2.4 percent. The
rience higher incomes, and that, on net, only studies that
incomes of low-wage workers would prob- produce more
ably rise. But that doesn’t mean the mini- mixed evidence
mum wage is the best way to help low-wage are studies of
workers or low-income families, as research low-wage indus-
clearly demonstrates that a large share of tries, like retail
income gains from a higher minimum wage or restaurants. Notably, in these studies the
Questions to Discuss
flows to families with higher incomes. An job loss among those most affected by the 1. Suppose you are an economist in
alternative policy—the Earned Income Tax minimum wage may be masked by employ- charge of designing policy to help
Credit—targets benefits to lower-income ers substituting from lower-skilled to higher- low-wage workers. Would you prefer a
families far more effectively, is proven to skilled workers. minimum wage or an earned income
reduce poverty, and creates rather than True, some studies don’t find evidence of tax credit? Why?
destroys jobs. job loss. But advocates for a higher minimum 2. Suppose now you are a politician run-
Our survey finds other important results. wage can claim support from the overall body ning for office. Would it be easier to
First, contrary to what is sometimes claimed, of research evidence only if they discard most campaign on a platform of a higher
there is no tendency for the most recent of that evidence. The consensus of economic minimum wage or a more generous
research to provide less evidence of job loss. research on the effects of minimum wages earned income tax credit? Why?
Second, the sharper a study’s focus on workers points clearly to job loss, and policy makers
directly affected by the minimum wage, the should consider this job loss in weighing Mr. Neumark is a professor of economics at
stronger the evidence of job loss. For example, the potential costs and benefits of a sharp the University of California, Irvine.
the average employment elasticity for those increase in the minimum wage. ■

Source: The Wall Street Journal, March 19, 2021.

for sellers is $0.50 less, and sellers supply a quantity of ice cream that is appropriate
for that lower price. In other words, to induce sellers to supply any given quantity,
the market price must now be $0.50 higher to compensate for the effect of the tax.
As Figure 6 shows, the supply curve shifts upward from S1 to S2 by the exact size
of the tax ($0.50).

Step Three Having determined how the supply curve shifts, let’s now compare
the initial and the new equilibria. Figure 6 shows that the equilibrium price of ice
cream rises from $3.00 to $3.30, and the equilibrium quantity falls from 100 to 90
cones. Because sellers now sell less and buyers buy less, the tax reduces the size of
the ice-cream market.

Implications Now consider the question of tax incidence: Who pays the tax?
Although sellers, not buyers, send the money to the government, buyers and sellers
share the burden. Because the tax increases the market price from $3.00 to $3.30,

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 124 Part II How Markets Work

Figure 6 Price of
A Tax on Sellers Ice-Cream A tax on sellers shifts
Price Cone Equilibrium S2 the supply curve
When a tax of $0.50 is levied on buyers with tax upward by the size of
sellers, the supply curve shifts up by pay the tax ($0.50).
$3.30 S1
$0.50 from S1 to S2. The equilibrium Tax ($0.50)
quantity falls from 100 to 90 cones. Price 3.00
without 2.80 Equilibrium without tax
The price that buyers pay rises from
tax
$3.00 to $3.30. The price that sellers
receive (after paying the tax) falls from Price
$3.00 to $2.80. Even though sellers sellers
are legally responsible for paying receive
the tax, buyers and sellers share the
burden. Demand, D1

0 90 100 Quantity of
Ice-Cream Cones

buyers pay $0.30 more for ice-cream cones. Sellers get a higher price ($3.30), but
after paying the tax, they only keep $2.80 ($3.30 2 $0.50 5 $2.80), which is $0.20 less
than they did before. The tax makes both buyers and sellers worse off.
To sum up, this analysis yields two lessons:

● Taxes discourage market activity. When a good is taxed, the quantity sold is
smaller in the new equilibrium.
● Buyers and sellers share the tax burden. In the new equilibrium, buyers pay
more, and sellers receive less.

6-2b How Taxes on Buyers Affect Market Outcomes

Now consider a tax levied on buyers. Suppose that ice-cream lovers are required
to send $0.50 to the local government for each cone they buy. What are the law’s
effects? Let’s again turn to our three steps.

Step One The immediate impact is on the demand for ice cream. The supply
curve doesn’t change because, for any price, sellers have the same incentive to
provide ice cream to the market. But buyers now have to pay a tax to the gov-
ernment (on top of the price to the sellers), so the tax shifts the demand curve
for ice cream.

Step Two Next, determine the direction of the shift. Because the tax makes buying
ice cream less attractive, buyers demand a smaller quantity of ice cream at every
price. The demand curve shifts to the left (or, equivalently, downward), as shown
in Figure 7.
Once again, let’s be precise about the size of the shift. Because of the $0.50 tax
on buyers, their effective price is now $0.50 higher than whatever the market price
happens to be. For example, if the market price of a cone were $2.00, buyers would
face an effective price for buyers of $2.50. Because buyers look at their total cost,

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 Chapter 6 Supply, Demand, and Government Policies 125

Figure 7 Price of
A Tax on Buyers Ice-Cream
Price Cone Supply, S1
When a tax of $0.50 is imposed buyers
on buyers, the demand curve shifts pay
down by $0.50 from D1 to D2. The $3.30 Equilibrium without tax
Tax ($0.50)
equilibrium quantity falls from Price 3.00
without 2.80 A tax on buyers shifts
100 to 90 cones. The price that
tax the demand curve
sellers receive falls from $3.00
downward by the size
to $2.80. The price that buyers Price Equilibrium of the tax ($0.50).
pay (including the tax) rises from sellers with tax
$3.00 to $3.30. Even though receive
buyers are legally responsible for
paying the tax, buyers and sellers
D1
share the burden.
D2

0 90 100 Quantity of
Ice-Cream Cones

including the tax, they demand a quantity of ice cream as if the market price were
$0.50 higher than it actually is. In other words, to induce buyers to demand any
given quantity, the market price must now be $0.50 lower to make up for the effect
of the tax. The tax shifts the demand curve downward from D1 to D2 by the exact
size of the tax ($0.50).

Step Three Let’s now evaluate the effect of the tax by comparing the initial
equilibrium with the new one. In Figure 7, the equilibrium price of ice cream falls
from $3.00 to $2.80, and the equilibrium quantity drops from 100 to 90 cones. Once
again, the tax reduces the size of the ice-cream market. And once again, buyers
and sellers share the burden. Sellers get a lower price for their product; buyers
pay a lower market price to sellers than they previously did, but the effective price
(including the tax) rises from $3.00 to $3.30.

Implications If you compare Figures 6 and 7, you will notice a surprising conclusion:
Taxes on sellers and taxes on buyers are equivalent. In both cases, the tax inserts a
wedge between the price that buyers pay and the price that sellers receive. Regardless
of whether the tax is levied on buyers or sellers, the wedge remains the same. In either
case, it shifts the relative position of the supply and demand curves. In the new equi-
librium, buyers and sellers share the tax burden. The only difference between a tax on
sellers and a tax on buyers is who sends the money to the government.
To better understand the equivalence of these two taxes, imagine the government
collects the $0.50 ice-cream tax in a bowl on the counter of each ice-cream store. When
the tax is imposed on sellers, the sellers are required to place $0.50 in the bowl each time
they sell a cone. When the tax is imposed on buyers, the buyers must place $0.50 in
the bowl whenever they buy a cone. Whether the $0.50 goes directly from the buyer’s
pocket into the bowl, or indirectly from the buyer’s pocket into the seller’s hand and
then into the bowl, does not matter. Once the market reaches its new equilibrium,
buyers and sellers share the burden, regardless of how the tax is levied.

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 126 Part II How Markets Work

Can Congress Distribute the Burden of a Payroll Tax?

Case
Study If you have ever received a paycheck, you probably noticed that taxes
were deducted from the amount you earned. One of these taxes is called
FICA, an acronym for the Federal Insurance Contributions Act. The fed-
eral government uses the revenue from the FICA tax to pay for Social Security and
Medicare, the income support and healthcare programs for older Americans. FICA is
a payroll tax, which is a tax on the wages that firms pay their workers. In 2021, the
total FICA tax for the typical worker was 15.3 percent of earnings.
Who bears the burden of this payroll tax—firms or workers? When Congress
passed this legislation, it tried to divide the tax burden. According to the law, half
of the tax is paid by firms and half by workers. That is, half of the tax is paid out
of firms’ revenues, and half is deducted from workers’ paychecks. The amount
that shows up as a deduction on your pay stub is the worker contribution. (Self-
employed people generally pay the whole tax themselves.)
Our analysis of tax incidence, however, shows that lawmakers cannot dictate the
distribution of a tax burden so easily. A payroll tax is analyzed much the same as a
tax on a good like ice cream. In this case, the good is labor, and the price is the wage.
Again, the tax inserts a wedge—here, between the wage that firms pay and the
wage that workers receive (AKA “take-home pay”). Figure 8 shows the outcome.
When a payroll tax is enacted, the wage received by workers falls, and the wage
paid by firms rises. In the end, workers and firms share the burden, much as the
legislation requires. Yet this economic division has nothing to do with the legislated
one: The division of the tax burden in Figure 8 is not necessarily 50–50, and the same
outcome would prevail if the law imposed the entire tax on either workers or firms.
This example highlights an often overlooked lesson. Lawmakers can decide
whether a tax comes from the buyer’s pocket or from the seller’s, but they cannot
legislate the true burden of a tax. Rather, tax incidence depends on the forces of sup-
ply and demand. ●

Figure 8
Wage
A Payroll Tax
A payroll tax places a wedge between Labor supply
what firms pay and what workers receive.
Comparing wages with and without the
tax makes it clear that workers and firms
Wage firms pay
share the tax burden. This division does
not depend on whether the government Tax wedge
imposes the tax entirely on workers, Wage without tax
imposes it entirely on firms, or divides it
equally between the two groups.
Wage workers
receive

Labor demand

0 Quantity
of Labor

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 Chapter 6 Supply, Demand, and Government Policies 127

6-2c Elasticity and Tax Incidence

How exactly is the tax burden divided between buyers and sellers? Only rarely
will it be shared equally. To see this, consider the impact of taxation on the two
markets in Figure 9. In both cases, the figure shows the initial supply and demand
curves and a tax that drives a wedge between what buyers pay and sellers receive.
(Not drawn in either panel is the new supply or demand curve. Which curve shifts
depends on whether the tax is levied on buyers or sellers, a fact that is irrelevant
for determining the tax’s incidence.) The difference between the two panels is the
relative elasticity of supply and demand.

Figure 9
(a) Elastic Supply, Inelastic Demand
How a Tax Burden Is Divided
Price
In panel (a), the supply curve is elastic, 1. When supply is more elastic than
and the demand curve is inelastic. In demand . . .
this case, the price received by sellers
Price buyers pay
falls only slightly, while the price paid
Supply
by buyers rises substantially. This means
that buyers bear most of the tax burden.
In panel (b), the situation is reversed: The Tax
supply curve is inelastic, and the demand 2. . . . the
curve is elastic. In this case, the price incidence of the
Price without tax tax falls more
received by sellers falls substantially,
heavily on
while the price paid by buyers rises only Price sellers consumers . . .
slightly. Here, sellers bear most of the receive
burden.
3. . . . than
Demand
on producers.

0 Quantity

(b) Inelastic Supply, Elastic Demand

Price
1. When demand is more elastic than
supply . . .
Price buyers pay Supply

Price without tax 3. . . . than on

consumers.
Tax

2. . . . the Demand
Price sellers incidence of
receive the tax falls
more heavily
on producers . . .

0 Quantity

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 128 Part II How Markets Work

Panel (a) of Figure 9 shows a tax in a market with very elastic supply and rela-
tively inelastic demand. That means that sellers are very responsive to changes in
the price (so the supply curve is relatively flat), while buyers are not very respon-
sive (so the demand curve is relatively steep). When a tax is imposed on a market
like this one, the price received by sellers does not fall much, so sellers bear only a
small burden. But the price paid by buyers rises substantially, indicating that they
bear most of the tax burden.
Panel (b) of Figure 9 shows a tax in a market with fairly inelastic supply and very
elastic demand. In this case, sellers are not very responsive to changes in the price (so
the supply curve is steeper), while buyers are very responsive (so the demand curve
is flatter). When a tax is imposed, the price paid by buyers doesn’t rise much, but the
price received by sellers falls substantially. Thus, sellers bear most of the tax burden.
Together, the two panels show a general lesson: A tax burden falls more heavily
on the side of the market that is less elastic. Why is this true? In essence, elasticity
measures the willingness of buyers or sellers to leave the market when conditions
worsen. A small elasticity of demand means that buyers do not have good alterna-
tives to consuming this particular good. A small elasticity of supply means that
sellers do not have good alternatives to producing this particular good. When the
good is taxed, the side of the market with fewer good alternatives is less willing to
leave the market and bears more of the burden of the tax.
This logic applies to the payroll tax discussed in the previous case study. Because
economists have generally found that labor supply is less elastic than labor demand,
workers, rather than firms, bear most of the burden of the payroll tax. In other
words, the distribution of the tax burden is far from the 50–50 split that lawmak-
ers intended.

Who Pays the Luxury Tax?

Case
Study In 1990, Congress adopted a luxury tax on items such as yachts, pri-
vate airplanes, furs, jewelry, and high-end cars. The goal was to raise
revenue from those who could most easily afford to pay. Because only
the rich could afford such extravagances, taxing luxuries seemed like a logical
way of doing that.
Yet, when the forces of supply and demand took over, the outcome was not what
Congress intended. Consider the market for yachts, for example. The demand in
this market is quite elastic. A billionaire can easily not buy a yacht; the money can
be used to buy an island, take a more luxurious vacation, or leave a larger bequest
to heirs. By contrast, the supply of yachts is relatively inelastic, at least in the short
run. The shipyards that produce yachts are not easily converted to
alternative uses, and the workers who work there are not eager to
change jobs in response to changing market conditions.
Our analysis makes a clear prediction. With elastic demand and
VALENTINRUSSANOV/E+/GETTY IMAGES

inelastic supply, the tax burden falls largely on the suppliers. In this
case, a tax on yachts places the burden largely on the businesses and
workers who build yachts because they end up getting significantly
less for their vessels. The workers are not wealthy, even if some of the
business owners are. In the end, the burden of a luxury tax can fall
more on the middle-class workers than on the rich customers.
The mistaken assumptions about the incidence of the luxury tax
quickly became apparent after it went into effect. Suppliers of luxuries
“If this boat were any more expensive, made their elected representatives well aware of their problems, and
we’d be playing golf.” Congress repealed most of the luxury tax in 1993. ●

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 Chapter 6 Supply, Demand, and Government Policies 129

QuickQuiz
5. A $1 per unit tax levied on consumers of a good is 7. Which of the following increases the quantity
equivalent to supplied, decreases the quantity demanded, and
a. a $1 per unit tax levied on producers of the good. increases the price that consumers pay?
b. a $1 per unit subsidy paid to producers of the a. the passage of a tax on a good
good. b. the repeal of a tax on a good
c. a price floor that raises the good’s price c. the imposition of a binding price floor
by $1 per unit. d. the removal of a binding price floor
d. a price ceiling that raises the good’s price by 8. Which of the following increases the quantity
$1 per unit. supplied, increases the quantity demanded, and
6. When a good is taxed, the burden falls mainly on decreases the price that consumers pay?
consumers if a. the passage of a tax on a good
a. the tax is levied on consumers. b. the repeal of a tax on a good
b. the tax is levied on producers. c. the imposition of a binding price floor
c. supply is inelastic and demand is elastic. d. the removal of a binding price floor
d. supply is elastic and demand is inelastic.
Answers are at the end of the chapter.

6-3 Conclusion
The economy is governed by two kinds of laws: the laws of supply and demand
and the laws enacted by governments. In this chapter, we have begun to see how
these laws interact. Price controls and taxes are common in various markets, and
their effects are frequently debated. Even a little bit of economic knowledge can go
a long way toward understanding and evaluating these policies.
Subsequent chapters analyze government policies in greater detail. We will exam-
ine the effects of taxation more fully and consider a broader range of policies. Yet
the basic lessons will not change: When analyzing government policies, supply and
demand are the first and most useful tools of analysis.

Chapter in a Nutshell
• A price ceiling is a legal maximum on the price of a • A tax on a good places a wedge between the price paid
good or service. Rent control is an example. If the ceil- by buyers and the price received by sellers. When the
ing is below the equilibrium price, then it is binding, market moves to the new equilibrium, buyers pay
and the quantity demanded exceeds the quantity sup- more for the good, and sellers receive less for it. In
plied. Because of the resulting shortage, sellers must this sense, buyers and sellers share the tax burden.
somehow ration the good or service among buyers. The incidence of a tax (that is, the division of the tax
• A price floor is a legal minimum on the price of a good burden) does not depend on whether the tax is levied
or service. The minimum wage is an example. If the on buyers or sellers.
floor is above the equilibrium price, then it is bind- • The incidence of a tax depends on the price elasticities
ing, and the quantity supplied exceeds the quantity of supply and demand. Most of the burden falls on the
demanded. Because of the resulting surplus, buyers’ side of the market that is less elastic because it cannot
demands for the good or service must somehow be respond as easily to the tax by changing the quantity
rationed among sellers. bought or sold.
• When the government levies a tax on a good, the equi-
librium quantity of the good falls. That is, a tax on a
market shrinks the market’s size.

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 130 Part II How Markets Work

Key Concepts
price ceiling, p. 112 price floor, p. 112 tax incidence, p. 121

Questions for Review

1. Give an example of a price ceiling and an example of does this policy change affect the price that buyers
a price floor. pay sellers for this good, the amount buyers are out of
2. Which causes a shortage of a good—a price ceiling or pocket (including any tax payments they make), the
a price floor? Justify your answer with a graph. amount sellers receive (net of any tax payments they
make), and the quantity of the good sold?
3. What mechanisms allocate resources when the price
of a good is not allowed to bring supply and demand 6. How does a tax on a good affect the price paid by
into equilibrium? buyers, the price received by sellers, and the quantity
sold?
4. Explain why economists frequently oppose price
controls. 7. What determines how the burden of a tax is divided
between buyers and sellers? Why?
5. Suppose the government removes a tax on buyers of a
good and levies a tax of the same size on sellers. How

Problems and Applications

1. Lovers of comedy persuade Congress to impose a. What are the equilibrium price and quantity of
a price ceiling of $50 per ticket for live comedy Frisbees?
performances. As a result of this policy, do more or b. Frisbee manufacturers persuade the government
fewer people attend comedy performances? Explain. that Frisbee production improves scientists’
2. The government has decided that the free-market understanding of aerodynamics and is thus
price of cheese is too low. important for national security. A concerned
a. Suppose the government imposes a binding price Congress votes to impose a price floor $2 above
floor in the cheese market. Draw a supply-and- the equilibrium price. What is the new market
demand diagram to show the effect of this policy price? How many Frisbees are sold?
on the price and quantity of cheese sold. Is there a c. Irate college students march on Washington and
shortage or surplus of cheese? demand a reduction in the price of Frisbees. An
b. Producers of cheese complain that the price floor has even more concerned Congress votes to repeal the
reduced their total revenue. Is this possible? Explain. price floor and impose a price ceiling $1 below the
c. In response to cheese producers’ complaints, the former price floor. What is the new market price?
government agrees to purchase all the surplus How many Frisbees are sold?
cheese at the price floor. Compared to the basic price 4. Suppose the federal government requires beer
floor, who benefits from this new policy? Who loses? drinkers to pay a $2 tax on each case of beer
3. A recent study found that the demand-and-supply purchased. (In fact, both the federal and state
schedules for Frisbees are as follows: governments impose beer taxes of some sort.)
a. Draw a supply-and-demand diagram of the
Price per Quantity Quantity market for beer without the tax. Show the
Frisbee Demanded Supplied price paid by consumers, the price received by
producers, and the quantity of beer sold. What
$11 1 million Frisbees 15 million Frisbees is the difference between the price paid by
10 2 12 consumers and the price received by producers?
9 4 9 b. Now draw a supply-and-demand diagram for the
beer market with the tax. Show the price paid by
8 6 6 consumers, the price received by producers, and
7 8 3 the quantity of beer sold. What is the difference
between the price paid by consumers and the
6 10 1

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