Government Intervention - Price Control

Question 1

Price Ceiling

Answer 1

maximum price is set below equilibrium price
=> in order to make goods more affordable to people on low incomes

Question 2

Price Floor

Answer 2

minimum price set above the equilibrium price

=> in order to provide income support to farmers or to increase the wages of low-skilled workers

Question 2

Why do governments intervene in markets

Answer 2

• Correct Market failure
• Earn revenue for the government
• Influence levels of consumption of households/consumer
• Promote equality
• Influence the levels of production of firms
• Provide support to households on low incomes
• Provide support to firms

Question 3

Consequences of price floors

Answer 3

• Surpluses
• Creation of black markets
• Governments needs to dispose of surplus
• Firm inefficiency
• Eliminates allocative efficiency & generates welfare loss
• Consequences for stakeholders

Question 4

Consequences of price ceilings

Answer 4

• shortage
• Generates rationing problem
• Non price rationing (first come, first serve)
• Promotes creation of parallel (black) markets
• Suppliers might choose to charge higher prices there but at least there is more supply for consumers
• Eliminates allocative efficiency and generates welfare loss
• Consequences for market stakeholders

Question 5

Difference between price controls and indirect tax/subsidy

Answer 5

Price controls
* Create fixed prices
* Create market distortions (shortages & surpluses)
* Prevent reach of equilibrium
* Prices cannot adjust naturally based on supply and demand

Indirect taxes & subsidies
* Alter costs/benefits of production and consumption = Shift supply curve
* Influence market equilibriums
* Government tends to be directly affected = either revenue or spending

Question 6

Non price rationing

Answer 6

when there’s a shortage, quantity is distributed based on first-come-first-serve, favouritism and coupons

Question 6

3 Forms of non price rationing

Answer 6

1. first come first serve

2.coupons

3. favouritism

Question 6

Price rationing

Answer 6

based on the consumers who are willing and able to buy a good and do so

Question 7

How are undeground/parallel markets created

Answer 7

Made for consumers who are willing and able to buy a good given a higher price => Type of price rationing

• Due to the market having a shortage of supply = consumers were unsatisfied
  => distributes quantity amongst consumers who are willing to purchase a good above legal maximum

Question 8

Welfare loss

Answer 8

Represents social surplus or welfare benefits that are lost to society because resources are not allocated efficiently

Question 9

Stakeholders

Answer 9

Individuals or groups of individuals who are interested or affected by something

Question 10

Price Ceiling - Example

Answer 10

Rent controls= Maximum legal rent on housing which is below the market determined level of rent
(To make housing more affordable to low income earners)

Question 11

Consequnces as rent controls as price ceilings

Answer 11

• Housing becomes more affordable to low income earners
• Shortage of housing (as demand is higher than quantity available)
• Long waiting lists of interested tenants
• Underground market where tenants sublet their apartments at rents above legal maximum (re renting)
• Run down/poorly maintained rental housing
• Unprofitable to renovate due to low rentals = low revenues

Question 12

Reasons why gov. impose a price floor

Answer 12

• increase income of producers and services that the government considers important
• protect workers by setting minimum wage = reasonable standard of living