Price Controls & Quotas Flashcards
Price Controls
Government imposed limits on prices that can be charged for goods and services.
Two types: price ceilings and floors.
Price Ceiling
Legal maximum that can be charged for a good or service.
Usually set below market equilibrium, leading to shortages.
Price floor
Legal minimum at which a good or service can be sold.
Usually set above market equilibrium, leading to surpluses.
Effects of Price Ceilings
- Inefficiently low quantity
a. The lower the controlled price, the larger the shortage - Inefficient allocation to customers
a. Consumers who value a good most likely will not get it
b. Goods are misallocated - Wasted resources
a. Buyers waste their resources (money, time) to get goods before they run out
b. Briberies, favors, waiting in line - Incentives for illegal activities
a. Black markets that ignore the price ceiling
Effects of Price Floors
- Inefficiently high quantity
a. Higher quantity than buyers are willing to sell
b. Producers cannot lower their price of good-quality service beyond a certain point - Wasted resources
a. Governments waste resources (money, time) to buy back surplus and keep economies moving - Illegal activity
a. Black markets that ignore the price floors
Quotas
Upper limit set by government on quantity of a good that can be bought or sold
Often leads to inefficiencies similar to those created by price controls.
Limit on x-axis of graph (quantity)
Deadweight Loss
The loss in total surplus that occurs when a policy (like price controls) reduces the quantity transacted below the efficient market equilibrium mark
Inefficiency from Quotas
Reduction of quantity traded
Leads to deadweight loss and illegal activities
Quota Rent
Difference between the demand and supply price at the quota limit (vertical line in graph).
Equivalent to the earnings given to a holder when they acquire the right to sell a good under a quota.
