price floors

Question 1

define PRICE CONTROLS:

Answer 1

government-imposed restrictions on what can be charge for a good / service in the market.

used when Ep deemed undesirable by government

Question 2

define price floors

Answer 2

min legal price allowed by gov.

nothing can be bought/sold below this lower limit

Question 3

also means

Answer 3

price floor is above market equilibrium price

Question 4

what does price floors do

Answer 4

quantity exchanged is constrained by how much BUYERS willing / able to buy at this higher price

Question 5

equilibrium price & qty

Answer 5

force price up.
persistent surplus.
Ep up, Eq left

Question 6

Efficiency (society’s economic welfare is maximised)

Answer 6

if market is already efficient(current lvl of output maximises society’s welfare), gov interventions to market confirm will lead to loss of economic welfare. indirect taxes/subsidies/ price cellings/floors distort price signals and lead to loss of allocative efficency

Question 7

Certainty of outcome

Answer 7

Greater certainty in terms of effect on price / qty of good

Question 8

Feasility / Effect on gov budget

Answer 8

OFTEN TIMES gov need to buy surplus…

Question 9

Equity (equal sharing, exact distribution and division)

Answer 9

increase producer revenue eg for farmers as they earn a low income.

BUT it raises the prices of other food and necessities – affecting purchasing power of the poor, without ability to pay they drop out of the market so only those who can afford can enjoy the goods. Necessities represents a larger proportion of income for the poor– REGRESSIVE EFFECT

large commercial farmers will enjoy more benefits than the small ones cuz benefits are distributed to farmers in proportion to volume they produce

Question 10

Who bears the cost / burden??

Answer 10

• firms whose profits are squeezed by rising cost cuz no spending by gov
• workers who lose their jobs when firms reduce quantity of labour demanded

Question 11

evaluation:

Answer 11

1. For goods: gov spending on price floor = worsening gov budget position

opp cost of price floors: if gov keep on spending on one industry, then need to reduce expense /increase taxes for other areas. but increasing taxes means more problems (unemployement, less investment…)

this means for optimal allocation of funds, gov need balance marginal social benefit and marignal social cost

2. For labour: Minimum Wage Legislation / Policy [TARGETED AT THOSE WAGES WHO HAVE BEEN BELOW THE LEGISLATED WAGE RATE WITHOUT ANY POLICY PROECTION] (excess labour supply - unemployment for workers LdL1)