Lecture 8- Government intervention Pt 1 Flashcards
What is a price floor?
It is an economic policy used to set a legal minimum price for a good or service, above which transactions can take place.
Why are price floors used?
Used to protect producers or workers from receiving prices or wages deemed too low to sustain a desired standard of living.
How can price floors create inefficiencies?
If the price floor is set above the market equilibrium, they can lead to market inefficiencies and unintended consequences as they create a surplus in the market.
As at higher prices, produces are willing to supply more than consumers are willing to purchase.
Explain the impact of a surplus in the goods market.
Excess goods remain unsold, leading to wastage or financial losses for producers.
Explain the impact of a surplus in the labour market.
Unemployment rises and the supply of labour exceeds demand.
What are some advantages of price floors?
Income support:
Provides a safety net for producers or workers, ensuring a minimum income level.
Market stability:
Protects industries prone to price volatility, such as agriculture, by preventing prices falling too low.
Social welfare:
Helps achieve social objectives like poverty reduction or improved living standards.
What are the disadvantages of price floors?
Surplus creation:
Overproduction or excess supply in goods market.
Unemployment in labour markets
Resource misallocation:
Inefficient allocation of resources as production exceeds consumer demand.
Higher costs for consumers:
Consumers face higher prices, reducing their purchasing power and welfare.
Black markets:
Price floors can lead to informal or illegal markets as sellers or workers undercut official prices or wages to clear excess supply.
What is a pice ceiling?
A government imposed maximum legal price that producers are allowed to charge for a good or service.
How can price ceilings cause inefficiencies?
When price ceilings are set below the market equilibrium price, it creates distortions, such as shortages.
What is an example of a price ceiling?
Rent control:
Rent control imposes a maximum legal price landlords can charge tenants for housing.
At the capped rent, more people seek housing, but landlords may reduce the number of rental units they supply due to lower profitability.
How do price ceilings create shortages?
Consumers demand more for the good or service at the lower price , but producers supply less, leading to excess demand.
How do price ceilings lead to deadweight loss?
The reduction in total surplus, prevents mutually beneficial transactions between buyers willing to pay more and sellers willing to provide more.
How do price ceilings lead to a misallocation of resources?
Some consumers who value the god less than other may obtain it because the lower prices does not allocate the good to the highest-value users.
What are some advantages of price ceilings?
Affordability:
Helps ensure that essential goods and services remain within reach for lower-income consumers.
Social Equity:
Reduces the economic burden on vulnerable populations, improving access to necessities like housing and food.
Crisis management:
Prevents price gouging during emergencies or disasters when demand spikes.
What are some disadvantages of price ceilings?
Shortages:
Supply cannot meet demand, leaving many consumers without access to the good or service.
Quality decline:
Producers may cut corners or reduce investment in production and maintenance due to reduced profitability.
Black markets: Unregulated markets may emerge, where goods are solf illegally at higher prices, undermining the policy intent.
Misallocation:
The absence of market-based prices signals can lead to inefficient distribution of goods and services
