Taxation and Price Control Taxes

Taxation and Price Control

Taxes and price controls are imposed by the government upon goods and services for a number of reasons. Taxes for example are levied to raise money for government-funded projects and operations, while price controls are imposed in response to the demands of either consumers for lower prices or producers for higher prices. Price controls can be implemented either in the form of price floors or price ceilings. Each of these has different respective effects upon the economy.

A price ceiling refers to a predetermined maximum price on the market for a good or service. When imposing a price ceiling, two market effects are possible, depending upon the level of the equilibrium price with respect to the price ceiling. When the ceiling price is above market equilibrium, there is no effect on the market, and the price ceiling is not binding. In other words, the natural occurrence of market forces moves the price towards its equilibrium. When the market equilibrium however rises above the ceiling, the price ceiling is a binding constraint for the market in question. A further effect of this is that shortages may result, as demand exceeds supply for the particular good.

A price floor refers to a predetermined minimum price for goods or services. Again, two outcomes are possible. If the price floor is lower than the market equilibrium, there is no effect on the market, as equilibrium is reached by the process of market forces. The price floor is therefore not binding. On the other hand, if the market equilibrium is lower than the price floor, it is not possible for market forces to reach the equilibrium towards which they work. The binding constraint of the ceiling floor causes a surplus of the good in question to develop. In other words, the supply of the good exceeds the demand.

As already mentioned, taxes are imposed in order to raise funds for public projects that are funded by the government. Taxes can be levied on various levels, of which goods is one. Generally, taxes on a good tend to be levied in order to fund a related project. Taxes on goods can also be levied on either buyers or sellers, with different effects for each. Because of additional tax, buyers have to pay more for a particular product, which causes a lower demand curve. Supply is not initially affected. However, as the decrease in demand becomes apparent, a decrease in supply is required to reach a new, lower equilibrium in both demand and supply. Hence the market for the good in question decreases in response to higher prices imposed by taxation on buyers.

When taxes are imposed upon sellers, the initial effect is upon the supply curve. Taxation raises the price of production, and hence the supply curve shifts; a lower quantity of the good in question is produced and prices concomitantly rise. The higher prices furthermore affect the demand level, which lowers in response. In this way, taxation on sellers also diminishes the market in question, as both supply and demand lower to reach the new equilibrium.

The ultimate effect of all forms of taxation on goods is therefore that both buyers and sellers are affected, as the market responds to both changes in demand and supply, regardless of which carries the initial effect.

II. PRICE CONTROLS and TAXATION on MILK

According to Chris Edwards (2007), the milk market has been affected by government-imposed price controls since the 1930s, with the implementation of "marketing order" regulations. According to these, minimum prices were imposed upon diary processors, which were payable to farmers. This policy limits marketing competition by imposing a minimum government price upon dairy products. In other words, entrepreneurs are unable to supply dairy products at competitive prices and raise demand as a result. Another effect of this price control factor on the market is that lower-cost regions are restricted from obtaining market shares in regions where the costs are higher. Specifically, Edwards notes that Cincinnati residents were paying an average of $2.68 per gallon of milk in 2006, compared with New Orleans residents, who paid $4.10.

A further control upon price was imposed in 1949, according to Edwards, when a price-support program was implemented to assist farmers. In this program, government guaranteed their purchase of cheese, butter and dry milk at a minimum price; in this way ensuring that market prices remained high. A further income support program was implemented for dairy farmers in 2002, by which cash payments would be distributed if prices fell below predetermined targets. This results in overproduction even while prices remain artificially inflated. According to Sue Dunlevy and Alex Dickinson (2008), the government however appears to plan some relief for dairy consumers by means of tax cuts projected for 2009.