Chapter 5 Flashcards
Define price controls
legal restrictions on how high or low a market price may go
What are the two main types of price controls
price ceiling, price floor
what are the side effects of price ceilings
Deadweight loss (shortage), inefficient allocation to customers, wasted resources, inefficiently low quality, black markets
describe inefficiently low quality
reduced quality, reduced services
describe inefficient allocation to customers
price controls lead to misallocation of apartments. rich people can take cheap apartments and low-income people are left with nowhere to live
describe wasted resources
wasting peoples time searching for the good or waiting in line. Think of OC, these people could be working instead of waiting in line
describe a price floor
sometimes governments intervene to push market prices up instead of down
what are the side effects of price floors
deadweight loss (surplus)
inefficient allocation among producers
wasted resources
inefficiently high quality
black market
a price floor reduces the _________ demanded below the market equilibrium and leads to a ________ ________
quantity
deadweight loss
describe inefficient allocation of sales among sellers
price floors misallocate sales by
1. allowing high-cost firms to operate
2. preventing low-cost firms from entering the industry
describes waster resources for price floors
they encourage waste, governments often have to buy unwanted surpluses
describe inefficiently high quality
quantity is higher than buyers are willing to pay for. They would rather lower quality so they can have a lower price
what is it called when the government controls quantity instead of price
quota
describe a quota
an upper limit, set by the government, on the quantity of some good that can be bought or sold; also refereed to as a quantity control
describe a license
the right, conferred by the government, to supply a good
what losses does quotas impose on society
deadweight loss
incentives for illegal activities
when is a quota binding
when it is below the equilibrium quantity
what is the quota rent
difference between price demanded and price supplied at the quota quantity
do quotas protect consumers or producers
accrues to producers, consumers lose
when is a price floor binding
when it is above equilibrium
when is price ceiling binding
when it is below equilibrium
