Chapter 5: Price Controls and Quotas Flashcards

1
Q

KEY TERM:
Price controls

A

legal restrictions on how high or low a market price may go.

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2
Q

KEY TERM:
Price ceiling

A

a maximum price that sellers are allowed to charge for a good or service, a form of price control.

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3
Q

KEY TERM:
Price floor

A

a minimum price that buyers are required to pay for a good or service, a form of price control.

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4
Q

KEY TERM:
Deadweight loss

A

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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5
Q

KEY TERM:
Inefficient allocation to consumers

A

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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6
Q

KEY TERM:
Wasted resources

A

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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7
Q

KEY TERM:
Inefficiently low quality

A

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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8
Q

KEY TERM:
Black markets

A

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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9
Q

KEY TERM:
Minimum wage

A

a legal price floor on the wage rate.

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10
Q

KEY TERM:
Inefficient allocation of sales among sellers

A

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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11
Q

KEY TERM:
Inefficiently high quality

A

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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12
Q

KEY TERM:
Quota

A

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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13
Q

KEY TERM:
Quota limit

A

the total amount of a good under a quota or quantity control that can be legally transacted.

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14
Q

KEY TERM:
Licenses

A

the right to supply a good (conferred by the government or an owner).

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15
Q

KEY TERM:
Demand price

A

the price of a given quantity at which consumers will demand that quantity.

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16
Q

KEY TERM:
Supply price

A

the price of a given quantity at which producers will supply that quantity.

17
Q

KEY TERM:
Wedge

A

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.

18
Q

KEY TERM:
Quota rent

A

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.

19
Q

Why do governments intervene with price/quantity controls?

A

The equilibrium price does not please either buyers or sellers.

20
Q

4 types of inefficiency with price ceilings

A

Inefficiently low quantity supplied - equilibrium results in the maximisation of surplus.
Inefficient allocation to consumers
Wasted resources
Inefficiently low quality

21
Q

Other than inefficiencies, what do price controls cause?

A

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.

22
Q

Common negative traits of price controls?

A

A persistent ceiling/surplus
4 types of inefficiencies
Black markets

23
Q

Why do price ceilings exist?

A

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.

24
Q

Do price ceilings make consumers better off?

A

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.

25
What happens to unwanted surplus in a price floor?
It depends on government policy. If government does not buy up the surplus, potential sellers cannot match buyers.
26
4 types of inefficiency with price floors
Inefficiently low quantity demanded - leads to deadweight loss. Inefficient allocation of sales among sellers Wasted resources - especially government purchases of unwanted surpluses. Inefficiently high quality - this represents a missed opportunity.
27
Why do price floors exist?
Benefit some influential sellers Government officials are uninformed Protectionist policies (?)
28
Usefulness of PED
Enables governments to assess impacts of taxation. Enables firms to asses impact of price change. Unit-free and can be used for comparisons.
29
What happens with a binding quota?
The demand price is greater than the supply price. The wedge between these two prices is the quota rent, a result of the restrictions placed by the quantity limit. Since the quantity transacted has reduced (as with price controls), there is deadweight loss.
30
How are quota limits enforced?
Typically, the government limits quantity in a market by issuing licenses; only people with a license can legally supply the good.
31
What is the market created by a quota?
A market for licenses. There are now two transactions: one for the good and the other for licenses.
32
2 inefficiencies of quotas?
Deadweight loss - some mutually beneficial transactions don’t occur (missed opportunities). If the demand price of a given quantity exceeds the supply price, there is a deadweight loss. Incentives for illegal activities to circumvent quotas.