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Week 7 · Lecture outline

Week 7 — Lecture Outline · Government Intervention: Price Controls, Taxes & Subsidies

Principles of Microeconomics · ECON 1 Fall 2026 · Prof. Kessler Fictional sample

Course: Principles of Microeconomics (ECON 1) · Silver Oak University (fictional sample) · Prof. Kessler
Objective 4 — surplus, efficiency & government intervention (price controls, taxes, subsidies, deadweight loss) · SLO A & B
Meeting pattern: two 75-min sessions (≈150 min). Segment minutes below total ≈150 — scale to your room.

The deck (E), the tutorial (C), and the workshop (P) all teach from this outline. Every number here is pre-computed and independently verified (see the verified box in §4).

Week at a glance
Big question When a government sets a price or levies a tax, who really bears the cost — and how much efficiency is sacrificed?
By week's end students can (1) identify binding vs. non-binding price controls; (2) predict ceiling → shortage and floor → surplus; (3) compute tax incidence (buyer and seller burden); (4) calculate tax revenue and DWL; (5) evaluate minimum-wage and rent-control policies evenhandedly.
Key vocabulary price ceiling, price floor, binding vs. non-binding, shortage, surplus, tax incidence, buyer price (Pb), seller price (Ps), tax wedge, tax revenue, deadweight loss (DWL), subsidy
Materials whiteboard; Week-7 readings/links; Desmos for graphing the tax wedge; approved chatbot
Timing note 8 segments ≈ 150 min across two sessions. Trim Segment 7 (interaction) if short on time.

Segment 1 — HOOK: "Who really pays the rent cap?" (12 min)

Open with a quick scenario: "A city caps rents at $900/month. If the market rent is $1,200, does that mean every renter saves $300?" Take responses, then flip the question: what happens to the quantity of apartments available? Today's toolkit shows that price controls always have a second-order effect on quantities—and that the person who legally pays a tax isn't always the one who economically bears it.

Segment 2 — PLAIN-LANGUAGE IDEA: price controls (18 min)

Price Ceilings

A price ceiling is a legal maximum price. If the ceiling is below the equilibrium price, it is binding: it prevents the market from clearing, and the result is a shortage (Qd > Qs). If the ceiling is above equilibrium, it is non-binding: it constrains nothing, and the market operates at its free equilibrium.

Memory line: "Ceiling = cap = below equilibrium to bite → shortage."

Price Floors

A price floor is a legal minimum price. If the floor is above equilibrium, it is binding, and the result is a surplus (Qs > Qd). If it is below equilibrium, it is non-binding.

Memory line: "Floor = minimum = above equilibrium to bite → surplus."

Examples students know

  • Rent control: a price ceiling on apartments (binding → shortage of housing).
  • The minimum wage: a price floor on labor (binding in low-wage markets → surplus of labor in the basic model).

The classic traps to kill now

  • "A ceiling always creates a shortage." No — only a binding ceiling (below equilibrium).
  • "A floor always creates a surplus." No — only a binding floor (above equilibrium).

Segment 3 — WORKED EXAMPLE #1: price ceiling with our market (15 min)

Market: Demand P = 20 − 0.5Q, Supply P = 4 + 0.5Q → equilibrium Q = 16, P = 12.

✅ VERIFIED NUMBERS

Set 20 − 0.5Q = 4 + 0.5Q → Q = 16, P = 12.

Scenario A — ceiling at P = 8 (binding, since 8 < 12):
- Qd at P=8: Q = (20−8)/0.5 = 24
- Qs at P=8: Q = (8−4)/0.5 = 8
- Shortage = 24 − 8 = 16 units

Scenario B — floor at P = 16 (binding, since 16 > 12):
- Qd at P=16: Q = (20−16)/0.5 = 8
- Qs at P=16: Q = (16−4)/0.5 = 24
- Surplus = 24 − 8 = 16 units

Say it in words: "The ceiling holds price below the clearing level—more people want the good at the low price, fewer sellers are willing to supply it, so we get a shortage. The floor holds price above—more sellers want to sell, fewer buyers want to buy, so we get a surplus."

Segment 4 — THE TAX MODEL: incidence and DWL (30 min)

The tax wedge

A per-unit tax drives a wedge between what buyers pay (Pb) and what sellers receive (Ps): Pb − Ps = tax. The government collects the middle: tax revenue = tax × Q_new. The lost transactions—trades that would have happened without the tax but don't—are the deadweight loss (DWL).

Setting up the tax (using our verified market)

A $4/unit tax on sellers raises their effective supply curve by $4: the old supply was P = 4 + 0.5Q; with the tax, sellers need P = (4+4) + 0.5Q = 8 + 0.5Q to supply the same quantities (they still need to net $4 + 0.5Q after paying the tax).

✅ VERIFIED NUMBERS — $4 tax on the verified market

New equilibrium: 20 − 0.5Q = 8 + 0.5Q → Q = 12.
Buyer price: Pb = 20 − 0.5(12) = 14.
Seller price: Ps = Pb − tax = 14 − 4 = 10. (Check: 4 + 0.5(12) = 10 ✓)
Buyer burden: Pb − P = 14 − 12 = 2.
Seller burden: P − Ps = 12 − 10 = 2.
Tax revenue: 4 × 12 = 48.
DWL: ½ × 4 × (16 − 12) = ½ × 4 × 4 = 8.

Read these numbers out loud and in words

  • "Before the tax, buyers paid 12 and sellers received 12. After the tax, buyers pay 14 and sellers net 10. The $4 tax was split 50/50—$2 from each side—because the demand and supply slopes are identical here."
  • "Society loses 8 units of surplus because 4 transactions (Q went from 16 to 12) that would have been mutually beneficial no longer happen."

Why incidence ≠ who writes the check

The seller legally pays the tax—but economists care about who bears the burden. If demand were perfectly inelastic (a vertical line), buyers would absorb 100% of the tax. If demand were perfectly elastic (horizontal), sellers would. With equal slopes, the split is 50/50. The more inelastic side bears the larger share.

DWL formula

DWL = ½ × (tax per unit) × (change in quantity) = ½ × t × ΔQ.

Subsidies (brief)

A subsidy is the mirror image: the government pays part of the cost, shifting supply down (or demand up), lowering the price buyers pay, raising the price sellers receive, increasing Q above the free-market level. If the subsidy exceeds the efficient level, it also creates a DWL (overproduction relative to the social optimum). Full treatment in Week 14 (externalities).

Segment 5 — POSITIVE vs. NORMATIVE: min wage & rent control (15 min)

What the simple model says (positive)

  • Minimum wage is a price floor on labor. In a competitive labor market with a binding floor (min wage above the market-clearing wage), the basic model predicts a surplus of labor — unemployment — because Qs of labor > Qd. That is a positive (testable) result from the simple model.
  • Rent control is a price ceiling on rents. A binding ceiling (below market rent) produces a shortage of housing—fewer units supplied, more demanded. Also a positive result.

What the evidence and competing schools add (evenhanded)

These are contested areas in applied economics:
- Minimum wage: empirical research (notably Card and Krueger's 1994 study and extensive subsequent work) finds that moderate minimum-wage increases do not always reduce employment at the levels typically observed — possibly because low-wage labor markets have monopsony power (employers have market power over workers, so the simple competitive model doesn't apply cleanly). There is genuine professional disagreement about the magnitude and direction of employment effects. The normative question—whether the policy is desirable—involves value judgments about distribution, fairness, and who gains vs. who bears any costs.
- Rent control: most economists agree that strict rent control reduces the quantity and quality of housing over time (supply response); but researchers debate the magnitude, and targeted voucher-versus-control comparisons complicate the picture. The normative question involves trade-offs between current tenant stability, long-run housing supply, and distributional goals.

Keep the line clear: "A binding price floor in a competitive labor market produces unemployment in the basic model" is a positive result. "We should raise the minimum wage" is a normative judgment that weighs the model's prediction against evidence on monopsony, distributional goals, and social values.

Segment 6 — TECHNOLOGY WORKFLOW + AI-CRITIQUE (20 min)

Live demo (Desmos): Plot demand y = 20 − 0.5x and the original supply y = 4 + 0.5x to show the equilibrium at (16, 12). Then overwrite the supply with y = 8 + 0.5x (the tax-shifted curve) and show the new equilibrium at Q = 12, where demand gives P = 14 (Pb) and the old supply at Q = 12 gives P = 10 (Ps). The vertical gap between the two supply curves at Q = 12 is the $4 tax.

AI-critique moment: Ask a chatbot — "If a $4 tax is levied on sellers in a market with demand P = 20 − 0.5Q and supply P = 4 + 0.5Q, what is the new equilibrium quantity, buyer price, seller price, and the deadweight loss?" Then audit: chatbots frequently shift demand instead of supply, compute DWL as the full tax revenue (not ½ × t × ΔQ), or report incidence as 100% on sellers because they "pay" the tax. Make the class catch at least one error.

Segment 7 — INTERACTION: think-pair-share (10 min)

Pose: "If the government taxes gasoline and gasoline demand is more inelastic than supply, who bears more of the tax — buyers or sellers? Why?" Pairs reason it through. Target: the more inelastic side (buyers here) bears the larger share — they can't easily reduce quantity demanded when the price rises, so sellers can pass more of the tax forward. Confirm with the general principle: incidence falls more heavily on the more inelastic side.

Segment 8 — CALLBACKS, TEASE & THE WEEK'S WORK (10 min)

  • Callbacks: tie back to Week 6 — total surplus was maximized at the competitive equilibrium; now we see that both price controls and taxes reduce total surplus (the DWL is the loss). The consumer and producer surplus triangles shrink; the DWL triangle appears.
  • Forward tease: "Next week is the midterm — covering everything from scarcity and opportunity cost through today's tax incidence and DWL. Use the study guide, the exam-prep tutorial, and the practice exam in the midterm bundle. Every calculation we've done is fair game."
  • The week's work: Lecture Tutorial, Practice, Quiz 7, Discussion 7, Assignment 7, and Workshop 7 (solve the $4 tax on the verified market end to end).

Instructor FAQ — common stumbles

  • "Isn't a non-binding ceiling harmless?" Yes — by definition, a non-binding control doesn't change anything. Only binding controls distort.
  • "If sellers pay the tax, don't buyers get off free?" No — sellers raise the price they charge to recover part of the tax cost. The incidence depends on elasticities, not on who remits the check.
  • "Is DWL always bad?" DWL measures the transactions that don't happen. Whether eliminating the DWL is the right policy goal depends on why the tax exists — a corrective (Pigouvian) tax deliberately reduces an externality, and the DWL in that market is offset by a social benefit elsewhere (Week 14). The simple tax here has no such offset.
  • "Why is the DWL a triangle?" Because the supply and demand curves are linear, the lost surplus is a triangle with base = ΔQ and height = the tax wedge.
  • "What about a subsidy's DWL?" A subsidy pushes Q above the efficient level — that overproduction is also a triangle of DWL, for the mirror reason.

~ Prof. Kessler's edition · Fall 2026 · built with thecoursemaker.com