Chapter 5 : Price controls and Market efficiency

Question 1

Determinants of qt exchanged at desequilibrium prices

Answer 1

The lesser availability of Qd or Qs at the price set

Question 2

What is in excess with a binding price floor?

Answer 2

Supply

Question 3

What is in excess with a binding price ceiling?

Answer 3

Demand

Question 4

Definition of hidden market

Answer 4

Market where produce is sold at prices violating legal price controls.

If price ceilings give rise to hidden markets : government goals are thwarted.

Question 5

What are the 3 common government goals when imposing a price ceiling?

Answer 5

1. Restrict production
2. Keep specific prices down
3. Satisfy notions of equity in the consumption of a temporarily short-supplied product

Question 6

What part of the graph represents the potential surplus money gained by producers if selling their produce on the black market?

Answer 6

The area between the Qt exchanged at price ceiling and the price consumers are prepared to pay for that quantity

Question 7

How do we determine who gets the goods when there is a price ceiling (and therefore excess demand)?

Answer 7

1. Random lottery
2. Government rations
3. Seller’s preferences
4. First come, first serve

Question 8

What do binding rent controls lead to? (3)

Answer 8

Type of price ceiling. Leads to:
1. Housing shortage (Qd >Qs)
2. Alternative allocation schemes
3. Hidden markets

Question 9

Who gains and who loses from a binding rent control?

Answer 9

Gain : existing, current tenants
Lose : landlords and potential future tenants

Question 10

3 government solutions / alternative policies to binding rent controls

Answer 10

1. Public housing
2. Income assistance : subsidies to families to help them afford rent
3. Subsidies to landlords for housing production