S U P P L Y , D E M A N D , A N D G O V E R N M E N T P O L I C I E S

Here we analyze various types of government policy using only the tools of supply and demand. As you will see,the analysis yields some surprising insights. Policies often have effects that their
architects did not intend or anticipate.
We begin by considering policies that directly control prices. For example, rentcontrol
laws dictate a maximum rent that landlords may charge tenants. Minimumwage
laws dictate the lowest wage that firms may pay workers. Price controls are
sually enacted when policymakers believe that the market price of a good or service
is unfair to buyers or sellers. Yet, as we will see, these policies can generate inequities
of their own.
After our discussion of price controls, we next consider the impact of taxes.
Policymakers use taxes both to influence market outcomes and to raise revenue for
public purposes. Although the prevalence of taxes in our economy is obvious,
their effects are not. For example, when the government levies a tax on the amount
that firms pay their workers, do the firms or the workers bear the burden of the
tax? The answer is not at all clear—until we apply the powerful tools of supply
and demand.