Difficulty: 1/3 (Easy read, graphs may be somewhat difficult to decipher)
Review: 5/5 (The taxing part is hard to explain, but Mankiw does his best and it's good)
This chapter's focus is on policies, policy-making being the other role that economists take on other than being scientists. A variety of different policies affect the economy, including those of taxes, price floors/ceilings, minimum wage, etc. What are the effects?
For price ceilings, one above the equilibrium is non-binding, while one below the equilibrium is binding, and very detrimental to the market, causing shortage. It's the vice versa for price floors, they should be below the equilibrium to not be binding. (Minimum wage ends up falling in this category as a price floor for the labor market)
Next, Mankiw discusses taxes and tax incidence, the distribution of a tax burden. Taxes on buyers turn out to reduce the demand of the good by the amount of tax and reduces market size. Taxes on sellers reduce the supply of the good by the amount of tax and also reduces market size. Although in these two cases the buyer or the seller is taxed, it turns out both share the same tax incidence. So when the government tries to set tax incidence to fifty fifty, they should take into account supply and demand forces first.
Again, we turn to elasticity to measure whether the buyer or seller takes on more of the tax burden. Of course whichever curve is more elastic takes on less of the tax burden.
All in all, an economist policy maker must take into account elasticity and the laws of supply and demand if they are too successfully architecture a policy that does as intended.
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