Chapter 5: Price Controls and Quotas - Price Floors

Question 1

What are price floors for? (2)

Answer 1

• sometimes governments intervene to push market prices up instead of down
• like price ceilings, price floors are intended to help some people but generate predictable and undesirable side effects

Question 2

Price floor Graph

Answer 2

Question 3

What happens to excess supply in price floors? (5)

Answer 3

• it depends on government policy
• In the case of agricultural price floors, governments typically buy up unwanted surplus, and then must decide what to do with it
• some countries pay exporters to sell products at a loss overseas
• Canada some times gives surplus food away as foreign aid
• Or to avoid this, Canada some times pays produces not to produce at all or limits their ability to produce more output

Question 4

Why do price floors cause inefficiencies? (2)

Answer 4

• The persistent surplus that results from a price floor creates missed opportunities (inefficiencies) that resemble those created by the shortage that results from a price ceiling

Question 5

What characterizes how price floors cause inefficiencies? (4)

Answer 5

1.Deadweight loss from inefficiently low quantity
2. Encourage waste (govt purchase of unwanted surplus)
3. Inefficient allocation of sales among sellers
4. Inefficiently high quality

Question 6

What occurs in inefficient allocation of sales among sellers? (3)

Answer 6

• which companies get to sell at the higher price?
• Who is paid not to sell?
• Incumbent problem: allows high-cost firms to operate and prevents low-cost firms from entering the industry

Question 7

What occurs in inefficiently high quality?

Answer 7

• people may be willing to accept less for less
  ie transatlantic flights

Question 8

Why do we have minimum wage? (3)

Answer 8

• people need money to live
• but who benefits? does the policy reach that goal?
• Is there a better way?

Question 9

Minimum wage as a price floor graph

Answer 9

Question 10

Why does unemployment (persistent surplus) cause inefficiencies?

Answer 10

• creates missed opportunities
• resemble those created by the shortage that results from a price ceiling

Question 11

Using the characteristics of how price floors create inefficiencies, use them to describe unemployment (4)

Answer 11

1. Deadweight loss from inefficiently low quantity
   - small businesses want to hire at $9/hr, but it is illegal
2. Inefficient allocation of employees
   - who gets hired at the higher wage? Is it the group for whom the policy is aimed?
3. Inefficiently high quality
   - People who should invest in training to move to higher paying jobs may have less incentive to do so
4. temptation to break the law by selling at a lower price
   - can’t find employment? Some will work for less. Not regulated

Question 12

SO why are there price floors?

Answer 12

• some people really do benefit
• but govt officials often do not understand supply and demand analysis