Price Controls Andpollution Permits 4.1.8.9

Question 1

What are price controls

Answer 1

Occur when the government / regulators intervene in a market & set a legal level below which price cannot fall or above which a price cannot rise

Question 2

What is a price ceiling , what is it called on a diagram

Answer 2

When a price cannot rise above a set level , on a diagram it is called a ‘PMAX’

Question 4

How can u illustrate the imposition of a price ceiling/maximum price/PMAX

Answer 4

The price ceiling must be below the market equilibrium price
Demand extends
Supply contracts

Question 5

What is the result to demand if the price cannot rise to allocate resources

Answer 5

Excess demand

Question 7

Advantage of price ceilings

Answer 7

Some consumers benefit from buying at lower prices, for theses customers their consumer surplus increases
Can stabilise markets in the short term during periods of intense disruption
Can address market failure by preventing consumer exploitation - from monopolies

Question 8

Disadvantages of price ceilings

Answer 8

Excess demand could lead to
queues/ waiting lists
Black markets
Bribery
Reduces producer revenue can impact upon employment levels

Question 10

What is an evaluation for price ceilings

Answer 10

Does the government know the correct price
The impact depends on PES and PED

Question 11

What is a price floor?

Answer 11

Occurs when a price cannot fall below a set level (Pmin)

Question 12

Should the price floor be kept above or below the market equilibrium price

Answer 12

Must be above the market equilibrium price

Question 13

How do you illustrate the imposition of a price floor ?

Answer 13

Demand contracts
Supply extends (excess supply)

Question 15

Advantages with a price floor

Answer 15

Can address market failure ; negative externalities in consumption/ demerit goods
Can protect workers from low wage which may lead to inequality/ exploitation
Can protect producers where low prices prohibit production

Question 17

Evaluation of a price floor

Answer 17

Impact dopes depend on PES / PED

Question 19

What is a pollution permit

Answer 19

Attempts to use the market mechanism to reduce pollution
Also known as ‘carbon trading’ or ‘cap and trade’

Question 20

How do you illustrate the use of pollution permits or cap and trade

Answer 20

The government decides on a maximum level of pollution then issues permits for this level to firms
The limited supply is shown by the inelastic supply curve
Firms can then produce pollution within their permit level

Question 21

What is the price of permits determined by

Answer 21

Demand and supply