4.2 - Government intervention in microeconomics - Price controls

Question 1

Price controls

Answer 1

Refers to the setting of maximum or minimum prices by the government so that prices are not able to adjust to their equilibrium level determined by demand and supply. Result in market disequilibrium and shortages.

Question 2

Price Ceilings

Answer 2

A legal maximum price set below the equilibrium price, in order to make goods and services more affordable.

Question 3

Consequences of Price Ceiling - Shortages

Answer 3

They are set below the equilibrium level. Not interested buyers are able to buy the good because there is not enough of the good being supplied.

Question 4

Consequences of price ceilings on markets - Non-price rationing

Answer 4

Once a shortage arises, the price mechanism cannot achieve its rationing function. Some buyers who are willing and able to buy the good at Pc will go unsatisfied. The Qs will instead be distributed with methods such as favouritism or waiting in queue and getting goods on a first come serve basis.

Question 5

Consequences of price ceilings on markets - Under allocation of resources to the good and allocative inefficiency

Answer 5

Price ceiling being lower than the equilibrium price results in a small quantity supplied. Not enough resources are allocated to the production of the good and thus there is an underproduction of the good relative to the social optimum. Society is worse off

Question 6

Welfare loss

Answer 6

Represents the social surplus or welfare benefits that are lost to society because resources are allocated inefficiently

Question 7

Consequences for stakeholders: Consumers

Answer 7

Consumers partly gain and partly lose. Some consumers are able to purchase the good or service at the price ceiling price. However some consumers do not get to buy the good at all because there is not enough.

Question 8

Consequences for stakeholders: Producers

Answer 8

Producers are worse off because with the implementation of the price ceiling they produce a smaller quantity of the good at a lower price and thus suffer a decrease in revenues.

Question 9

Consequences for stakeholders: Workers

Answer 9

Fall in output so some workers are likely to be fired, resulting in unemployment.

Question 10

Consequences for stakeholders: Government

Answer 10

The government neither gains nor loses. They may gain popularity however by those who are better off by the price ceiling

Question 11

Rent controls