Th1.4: Minimum Prices Flashcards
1
Q
What is a minimum price?
A
a legally imposed price at which the price of the good cannot go below
2
Q
What are minimum prices set on and why?
A
goods with negative externalities so that the price is raised to the social optimum point and consumption is discouraged
3
Q
What do minimum prices encourage producers to do?
A
produce more goods, so minimum prices can be set on goods with social benefits that are under-provided by the market
4
Q
Refer to PP
Look at Graph 23. Where is the market equilibrium?
A
P1Q1
5
Q
Why is shown by the shaded area and why?
A
the minimum price is set at P2 and as a result QD is demanded but QS is supplied, resulting in excess supply of QS-QD
