Government intervention Flashcards
Price ceiling:
Price control measure establishes an upper limit. It is illegal to charge a price higher than the ceiling price.
Price floor:
Establishes a lower limit. It is illegal to pay less than the minimum price. Based on normative view.
Purpose of a price ceiling:
To make certain goods and services more affordable for households.
Rent control:
Is a price ceiling which puts an upper limit on the rent that a property owner can charge.
Consequences of a price ceiling:
Persistent shortage develops.
Increase in rationing costs - Costs associated with things such as queuing or developing administration system.
An illegal / “black” market develops and makes illegal trade profitable.
Opportunities for corruption and bribery are created.
Price ceiling creates winners and losers:
People who are able to acquire the good or service benefit. Fewer consumers paying a lower price. Producers lose out because they are willing to supply higher quantity at a higher price. At a lower price they supply a lower quantity.
Purpose of price floors:
Called “price supports”. Support a price by preventing it from falling below a certain level. To prevent these swings and to stabilise the agriculture sector.
Consequences of a price floor:
Persistent surplus develops.
Consumers, including poor households, have to pay artificially high prices.
Inefficient producers are protected and manage to survive.
The disposal of the market surplusses usually entails further costs to tax payers and welfare losses to society.
Government is forced to increase its intervention in the market and thius improve even more costs on the system.
Price floors creates winners and losers:
Producers that can sell at the higher price benefit, while consumers lose since they have to pay a higher price. At this higher price, there are fewer consumers of the good and service.
