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Econ Higher > Price Control, Government Intervention and Unintended Consequences > Flashcards

Price Control, Government Intervention and Unintended Consequences Flashcards

1
Q

What are the two reasons governments intervene in a market?

A

To help consumers To help producers

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2
Q

What is it called when the government sets a price that is different to the equilibrium price?

A

Price control

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3
Q

When do the government help consumers?

A

When they perceive the price to be too high

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4
Q

How does the government help consumers?

A

They put a price ceiling. This is a disequilibrium price.

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5
Q

What is a price ceiling?

A

A price that by law you cannot go above

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6
Q

What are the necessary conditions of a price ceiling?

A

It must be set below the PE

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7
Q

What happens if the price ceiling is set above the PE?

A

Nothing, in this market PE will prevail

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8
Q

When do the government help producers?

A

When they perceive the price is too low

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9
Q

How do the government help producers?

A

They put a price floor. This is a disequilibrium price.

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10
Q

What is a price floor?

A

A price that by law you cannot go below

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11
Q

What are the necessary conditions of a price floor?

A

It must be set above the PE

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12
Q

What happens if the price floor is set below PE?

A

Nothing happens, in this market PE will prevail

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13
Q

When their is a price ceiling set, is there an equilibrium between Qd and Qs?

A

No, they are in disequilibrium. Qd > Qs

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14
Q

What are the five unintended consequences of a price ceiling?

A
  1. Excess demand or shortage
  2. Line up for the product
  3. Dead weight loss
  4. Black market
  5. Search activity
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15
Q

What is it called when Qd > Qs?

A

Shortage, or excess demand

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16
Q

Will shortage last?

A

Yes, as long as the government is in control

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17
Q

Why does excess demand occur with price ceilings?

A

Producers reduce their quantity supplied while quantity demanded increases as the price is lowered. Therefore quantity demanded is greater than quantity supplied and there is shortage.

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18
Q

Do the government mean to create shortage?

A

Obviously not. It is the first unintended consequence.

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19
Q

What mechanisms can to government put in place to combat shortage?

A

Put in place other non-market mechanisms such as queing (putting people on waitinglists) or rationing (sharing the product in some way between customers).

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20
Q

What else can the government do to reduce shortage?

A

The governemnt can subsidize the product. This will shift the supply curve to the right and reduce excess demand.

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21
Q

What is the downside of subsidies?

A

The taxpayers are the ones subsidising the consumers of the good when they may not consume the good themselves.

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22
Q

What is consumer surplus?

A

The difference between how much consumers are willing and able to pay for a good or service and the amount they actually pay.

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23
Q

How can you calculate consumer surplus from a graph?

A

The area above the PE, below the demand curve

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24
Q

What is the producer surplus?

A

It is the difference between the minimum amount a producer is willing to receive and the actual amount they receive.

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25
Q

How do you calculate producer surplus?

A

The area below the PE, above the supply curve.

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26
Q

How do you calculate consumer surplus before government intervention?

A

1 + 2 + 3 The area above the PE below the demand curve

27
Q

How do you calculate producer surplus before government intervention?

A

4 + 5 + 6 The area below PE, above the supply curve

28
Q

How do you calculate consumer surplus after a price ceiling?

A

1+2+4 The area above the price ceiling below the demand curve, where the new Qs is.

29
Q

How do you calculate producer surplus after a price ceiling?

A

6 Above the supply curve, below the price ceiling where the new Qs is.

30
Q

How do you calculate GTS after a price ceiling?

A

1+2+4+6 CS after + PS after

31
Q

What happens to area 3+5?

A

They are lost. This is called dead weight loss.

32
Q

What is dead weight loss?

A

The loss to society, coming from CS and PS.

33
Q

When is there dead weight loss?

A

Every time you move away from QE.

34
Q

What is the black market?

A

Illegal markets in which the the price is higher than the legally imposed price ceiling.

35
Q

How much do you pay on the black market?

A

The highest possible price, your original willingness to pay. This means as a result of the price ceiling you have lost as you pay more than the original price equilibrium.

36
Q

What areas represent search activity?

37
Q

What is search activity?

A

The maximum amount you are willing to pay (in time) to find someone to do business with.

38
Q

What is the total cost of a good with a price ceiling?

A

The total cost of the good is equal to the price you pay for it (the price ceiling) plus the cost of the time and other resources spent searching.

39
Q

Why is search activity bad then?

A

It means that the total cost can end up being higher than the unregulated market price you would have paid without the price ceiling.

40
Q

What does search activity mean for CS after?

A

It could end up being just area one.

41
Q

What are the solutions to the unintended consequences of the price ceiling?

A
  1. To remove the price ceiling (not happening)
  2. Increase supply
  3. Decrease demand
42
Q

How can you increase supply?

A
  1. Subsidies
  2. Increase imports
  3. Provide their own housing
  4. Lower the price of raw materials
43
Q

How can you decrease demand?

A
  1. Decrease population
  2. Limit quantity (e.g. share accomodation)
  3. Rationing
  4. Lower the price of substitutes
  5. Increase the price of compliments
  6. Increase taxes
  7. Decrease income
44
Q

Is decreasing demand or increasing supply a better solution to the price ceiling?

A

Increasing supply makes more sense

45
Q

What are the fourunintended consequences of a price floor?

A
  1. Surplus
  2. Dead weight loss
  3. Informal sector
  4. Search activity
46
Q

What is surplus?

A

When Qs>Qd

47
Q

What are the benefits of the informal sector to the employers?

A

They pay less

Laws don’t apply

No payroll taxes

No insurance

48
Q

What are the benefits of the informal sector to the producers?

A

They have a job

They don’t pay taxes

They can still get unemployment insurance

49
Q

What is GTS before and after price floor?

A

before 1 2 3 4 5 6

after 1 2 4 6

(same as price ceiling)

50
Q

Solutions to the price floor?

A

Get rid of minimum wage (don’t do that)

Get rid of surplus

51
Q

How can you get rid of surplus?

A

Increase demand

Decrease supply

52
Q

How can you increase demand of employment?

A

Governement creates projects (creates demand for jobs)

Subsidise employers

Shorten work hours

53
Q

How can you decrease supply of employment?

A

Decrease population

Increase working age

Decrease retirement age

Decrease tuition fees, offer scholarships, make school affordable

54
Q

In the case of agriculture how can you increase demand?

A

Increase the population

Buffer stock

Dumping

55
Q

What are buffer stocks?

A

The government buys stocks to keep P at PF and sells them during shortage.

56
Q

What is the problem with buffer stock?

A

It requires storage which requires taxpayer money that could be spent on other projects

some goods are perishable

57
Q

What is dumping?

A

Put all the surplus in one country at low price

58
Q

What is the problem with dumping?

A

It trashes the local economy as the farmers cant make money and everyone is dependent on aid

59
Q

In the case of agriculture how do you decrease supply?

A

Set aside

Quota

60
Q

What is set aside?

A

The governement pays people to not work

61
Q

What is the problem with set aside?

A

It is a burden on taxpayers, paying people to sit at home

62
Q

What is a quota?

A

It means the supply line is straight, the same supply at any price

63
Q

What is the problem with quotas?

A

It limits production

People tend to chear

Econ Higher (23 decks)

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