In this chapter, Mankiw begins to explain how government intervention can affect markets. In previous chapters, he explained how the market, made up of numerous buyers and sellers, cause prices to be naturally regulated. However, in this chapter he introduces the concept that the government can affect prices in the market based on two actions: the introduction of price ceilings and floors and taxation. Price ceilings and floors are boundaries that the government is able to put in place that can put a maximum or minimum on the price that a seller can sell a good for. These boundaries generally have a negative effect on markets because they skew the price away from the equilibrium price and then cause a shortage or surplus. Taxes are money that buyers and/or sellers are required to give to the government to increase government revenue. Taxes also generally discourage market activity because they reduce the size of the market and give buyers less incentive to buy. Ideally, the buyer and the seller share the burden of the tax regardless of whether the tax is on the good before or after it is sold. However, based on the elasticity of the good’s supply and demand, the tax burden is prone to shift more to the buyer or seller depending on the circumstances. If there is an elastic supply and relatively inelastic demand, the addition of the tax causes buyers to bear the burden. However, if the elasticities are switched, the burden goes to the sellers.
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