Consequences Of Intervenetion

Question 1

Describe Market Prices

Answer 1

Do not necessarily please buyers or sellers they may lobby the government to help them by altering the price

Question 2

Describe Price Controls
Name the two main types

Answer 2

Legal restrictions on how high or low a market price may go
-price ceiling
-price floor

Question 3

Define Price Ceiling
Define Price Floor

Answer 3

Maximum price sellers are allowed to charge for a good or service (usually set below eqm)
Minimum price buyers are required to pay for a good or service (usually set above eqm)

Question 4

Side effects for price ceilings

Answer 4

-inefficiently low quantity
-inefficient allocation to customers
-wasted resources
-inefficiently low quality
-black markets

Question 5

Describe price floors

Answer 5

Sometimes governments intervene to push market prices up instead of down
It reduces the quantity demanded market equilibrium quantity and leads to a deadweight loss
- minimum wage in many European countries has contributed to a high rate of unemployment and the flourishing of an illegal labour market
- setting minimum price for alcohol to discourage too much consumption

Question 6

Describe controlling quantities

Answer 6

Governments sometimes control quantity instead of price

Question 7

Define Quota
Define license

Answer 7

An upper limit set by the government on the quantity of some good that can be bought or sold (aka quantity control)
The right, conferred by the government, to supply a good

Question 8

Describe quota limit

Answer 8

The total amount of a good that can be legally transacted under a quota or quantity control
(i.e the maximum amount that can be bought or sold by buyers and sellers)

Question 9

Define demand price
Define supply price

Answer 9

The price of a given quantity at which consumers will demand that quantity
The price of a given quantity at which producers will supply that quantity

Question 10

Define the wedge/ quota/ rent

Answer 10

The difference between the demand price and the supply price at the quota limit. Equal to the market price of the license when the license is traded

Question 11

Describe quotas

Answer 11

They impose losses on society
-deadweight loss (some mutually beneficial transactions don’t occur)
-can result in illegal activities of selling goods without the required license