explain and analyse the different methods of market modification required to correct market failure, including price floors/ceilings

Question 1

Price Floors

Answer 1

• when the $ charged is more than the equilibrium price determined by demand/supply
• minimum prices set by the government for g/s that it believes are being sold in an unfair market with too low a $
• when $ is set above the market price, there will be an an excess supply/surplus –> producers will produce the larger quantity where the new price intersect their supply curve
• consumers will not buy that many goods at the higher price and so those goods will go unsold –> waste of scarce resources –> misallocation of resources –> market failure

Question 2

Price Ceilings

Answer 2

• when the price is set below the market price –> will be excess demand or a supply shortage –> producers won’t product as much at a lower price –> consumer will demand more bc goods are cheaper