Min/max Prices(government Intervenion)

Question 1

Where should maximum prices be set?

Answer 1

Below the Equilibrium

Question 2

Governments aim when they in-force maximum prices on a good

Answer 2

To increase consumption of a Merit good/meet society optimum

Question 3

Chain of reason of Max price effect on a Merit-good(under consumed)

Answer 3

1)Max price is placed(price ceiling)-below equilibrium

2)so:Producers have to decrease their prices

3)Demand expands,however supply contracts(No incentive-less profitable now)
4)Excess demand

Question 4

Why gov use max price on merit goods

Answer 4

To decrease its price, so the merit good is consumed more

Question 5

Chain of reasoning for use of Min price on DE-merit goods

Answer 5

1)Min price set-Above equilibrium(Price floor)
So:producers acc increase their prices

2)Market price increases
3)Demand deceases/contracts

4)Decrease in negative externalities of d-merit good

Question 6

Governments aim of using min price

Answer 6

Decrease consumption of the De-merit good/negative externalities it gives off

Question 7

Cons of using a minimum price

Answer 7

1)unjust-effects those who use the good safely
2)tax may be a better intervention method

Question 8

Limitation of implementing max prices

Answer 8

(Point)Firms will be put off entering market

(Cause)as theres: No incentive to supply as price is to low for suppliers to make profits

And:This new reduced price level cant be increased later on when there is excess demand (as theres a mx price)

Meaning:supply will possibly never be incentivised again

(Consequence)Long term shortage