Chapter 5: Price Controls and Quotas Flashcards
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Price controls
legal restrictions on how high or low a market price may go.
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Price ceiling
a maximum price that sellers are allowed to charge for a good or service, a form of price control.
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Price floor
a minimum price that buyers are required to pay for a good or service, a form of price control.
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Deadweight loss
the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity. A loss in surplus that accrues to noone as a gain.
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Inefficient allocation to consumers
a form of inefficiency in which some people who want the good badly and are willing to pay a high price don’t get it, and some who care relatively little about the good and are only willing to pay a low price do get it; often a result of a price ceiling (missed opportunity as re-arrange consumers can make people better off).
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Wasted resources
a form of inefficiency in which people/government expend money, effort, and time to cope with the shortages/surpluses caused by a price control (opportunity cost and missed opportunities constitutes wasted resources).
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Inefficiently low quality
a form of inefficiency in which sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price; often a result of a price ceiling.
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Black markets
a market in which goods or services are bought and sold illegally, either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price control.
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Minimum wage
a legal price floor on the wage rate.
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Inefficient allocation of sales among sellers
a form of inefficiency in which sellers who would be willing to sell a good at the lowest price are unable to make sales while sales go to sellers who are only willing to sell at a higher price; often the result of a price floor.
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Inefficiently high quality
a form of inefficiency in which sellers offer high-quality goods at a high price even though buyers would prefer a lower quality at a lower price; often the result of a price floor.
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Quota
an upper limit, set by the government, on the quantity of some good that can be bought or sold; also referred to as a quantity control.
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Quota limit
the total amount of a good under a quota or quantity control that can be legally transacted.
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Licenses
the right to supply a good (conferred by the government or an owner).
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Demand price
the price of a given quantity at which consumers will demand that quantity.
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Supply price
the price of a given quantity at which producers will supply that quantity.
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Wedge
the difference between the demand price and the supply price of the quantity transacted when the supply of the good is legally restricted. Often created by a quota. The price paid by buyers ends up being higher than that received by sellers.
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Quota rent
the difference between the demand price and the supply price at the quota limit; this difference, the earnings that accrue to the license-holder, is equal to the market price of the license when the licenses are traded.
Why do governments intervene with price/quantity controls?
The equilibrium price does not please either buyers or sellers.
4 types of inefficiency with price ceilings
Inefficiently low quantity supplied - equilibrium results in the maximisation of surplus.
Inefficient allocation to consumers
Wasted resources
Inefficiently low quality
Other than inefficiencies, what do price controls cause?
Black markets - encourages disrespect for the law in general. Illegal activity worsens the position of those who are honest. Yet black markets can diminish some of the inefficiency of rent control.
Common negative traits of price controls?
A persistent ceiling/surplus
4 types of inefficiencies
Black markets
Why do price ceilings exist?
Price ceiling benefit some.
Consumers are uncertain of what happens in a price ceiling is abolished.
Government officials do not conduct proper supply/demand analysis.
Do price ceilings make consumers better off?
It is unclear whether consumers collectively are made better off without direct calculation. Consumers enjoy a direct transfer of surplus from producers to them with the lowered prices but the greater the deadweight loss, the more likely consumers collectively lose.
