Gov intervention ( minimum and maximum price) Flashcards
minimum pirce definition
price floor - used to discourage consumption of de merit goods with negative externalities
minimum price analysis
there would be an overconsumption of of the demerit good due to prices being too low.
Gov impose a minimum price above the equilibrium
This higher price mean fewer people demand the good (contraction of demand)
This results in rationing of the product to only those who can afford it - (better allocation of scarce resources)
welfare will be maximised
Yet supply would expanded because ether is a increased incentive to supply - creates surplus/ excess supply
minimum price evaluation
Price inelasticity - Not see a fall in quantity Enough to solve market failure, For how much the price has increased they would’ve not been a significant enough decrease in quantity
it is Regressive - burden the poor and widen the income inequality in society with is a loss of a key macro objective
Alternative supply in the black market - cheaper and worse quality that the alcohol previously - more negative externality could make market failure worse- smuggling with could lead to Gov failure and tax rev could be lost by purchasing form illegal resources.
Firms may leave country if minimum price is set really high, shutting down of firms, unemployment yet if price inelastic, producers will see an increase of revenue.
If min price set too high regressiveness and black market become too prominent/ severe leading to guaranteed market failure
max price definition ?
price ceilings used in markets where price is deemed to high by Gov, lower price Level causes more equity and consumption of essential goods and services eg rent control.
Max price evaluation?
Shortage may be created as extension of demand yet contraction of supply because of lower price level. ( excess demand
Because of shortage ( people who do not have supply within excess demand) are likely to go to the black market - this sell for higher prices which people are happy to pay. Created a black Market due to shortage dangerous to consumers bees could be exploited have compromised quality.
producers building more luxury infrastructure apartment to get more profit leading to widen income inequality gap
Enforcement of of this law- set to low massive excess demand to high no increased consumption - getting right price level
costly - Gov may subsidies landlords or produce own housing to increase supply
maximum price analysis
government impose a below the equilibrium and price cannot go above the price level
The lower, maximum price makes the good more affordable and accessible to more consumers, leading to an increase in the quantity demanded
The lower price also reduces the incentive for producers to supply as much of the good, as they are earning less per unit sold.
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yet: The combination of increased demand and reduced supply results in a shortage or excess demand, where the quantity demanded exceeds the quantity supplied at the maximum price.
This shortage can lead to waiting lists, black markets, or even reduced quality of the good as producers struggle to meet the increased demand.
Draw and annotate a maximum price graph
Draw and annotate a minimum price graph
Is a maximum price used for merit or demerit goods?
Merit goods as imposing a maximum price means the price is places below the equilibrium as max - the low price will encourage consumption
Is a minimum price used for merit or demerit goods ?
Demerit goods- a minimum price set above equilibrium high price level discouraging consumption
