Price Controls, Government Intervention 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 16

What are indirect taxes and who pays them

Answer 16

They are levied on spending and is paid by a producer but it can be passed onto the consumer

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

Question 22

What is meant by a producer surplus

Answer 22

The difference between the price producers are willing and able to supply and the price they actually receive

Question 23

What is meant by consumer surplus

Answer 23

The difference between the price consumers are willing and able to pay and the price they actually pay

Question 24

What is the impact upon consumer and producer surplus when an indirect tax imposed?

Answer 24

Price of products go up , less of a consumer surplus p1-p2
Consumers benefit less and firms aren’t benefitting either as costs go up so they supply less
= deadweight loss
The cost of implementing the tax

Question 25

Positive effect of indirect taxes

Answer 25

Can address market failure
Raises tax revenue for the government

Question 26

Negative effects of indirect taxes

Answer 26

Potential job losses as output falls Fall in consumer and producer surplus & the deadweight loss of the tax Unintended consequences - formation of a black market Could contribute to inflation and reduce international competitiveness

Answer 27

Potential job losses as output falls Fall in consumer and producer surplus & the deadweight loss of the tax

Question 29

What are property rights

Answer 29

Property rights give people a legal right of ownership

Question 30

What does giving/ extending property rights help to address

Answer 30

Helps to address the tragedy of the commons and environmental market failures

Question 31

Why against property rights

Answer 31

The initial allocation of property rights can be very problematic - only the rich would be able to accesss Some resources cannot be owned - the air Enforcement costs

Question 32

What’s a for for property rights

Answer 32

Incentivises owners not to exploit the resource

Question 33

What is meant by state provision

Answer 33

Happens when the government provides a service or a good - normally merit goods

Question 34

Examples of state provision

Answer 34

NHS, defence and the police

Question 35

How can you illustrate the impact of state provision on supply an demand

Answer 35

The supply of the good or service might increase by the government so the supply curve would shift right The demand for a good or service might increase so the demand curve will shift right

Question 36

How can you illustrate excess demand for state provided goods & services

Answer 36

As the government provides a limited supply the supply cannot exceed past Q1 Resulting in excess demand for example Road congestion Oversubscribed schools NHS waiting times

Question 37

Against for state provision

Answer 37

It’s expensive No profit motive / competition to encourage efficiency - high levels of waste May result in excess demand

Question 38

For for state provision

Answer 38

Can address market failure

Question 39

Evaluation for state provision

Answer 39

Is it affordable Opportunity cost Are the costs > benefits

Question 40

What do we use a consumer surplus to analyse

Answer 40

The impact of a change in price upon the welfare of consumers