week 5 (GPT) Flashcards
What is a price ceiling?
A price ceiling is a government-imposed maximum price that can be legally charged for a good or service, usually set below the market equilibrium to protect consumers.
When is a price ceiling effective?
A price ceiling is effective only when it is set below the equilibrium price.
What is the purpose of a price ceiling?
To make essential goods more affordable for low-income consumers.
What is a price floor?
A price floor is a government-imposed minimum price that must be paid for a good or service, usually set above the equilibrium to benefit producers.
What happens if a price floor is set below equilibrium?
It has no effect on the market.
What is the result of a price ceiling on consumer and producer surplus?
Some consumer surplus increases, some is lost; producer surplus decreases; a deadweight loss is created.
What is deadweight loss?
A loss of economic efficiency when equilibrium is not achieved, and no one gains from it.
Who gains and who loses from a price ceiling?
Some consumers gain from lower prices, but others lose due to shortages. Producers lose due to lower prices and reduced output.
What is the result of a price floor on consumer and producer surplus?
Producer surplus increases for some, decreases for others; consumer surplus falls; deadweight loss occurs.
Why do governments implement price floors?
To protect producers, often in agriculture, ensuring they can earn enough revenue.
What is a subsidy?
A subsidy is a government payment to producers to encourage production and lower market prices.
How do subsidies affect surplus?
Consumer and producer surplus increase, but the government pays more than the combined gain—causing deadweight loss.
What is the more efficient alternative to subsidies or price controls?
Targeted direct income transfers to low-income individuals.
What is an indirect tax?
A tax placed on goods and services, like GST or excise taxes, which raises costs for sellers and prices for buyers.
Who bears the burden of an indirect tax?
It depends on elasticity. If demand is inelastic, consumers bear more; if elastic, producers bear more.
How does elasticity affect deadweight loss from taxes?
More elastic demand or supply leads to a larger deadweight loss.
What are exports?
Goods or services sold by a country to buyers in other countries.
What are imports?
Goods or services bought by a country from sellers in other countries.
What is a tariff?
A tax on imported goods, intended to protect domestic industries by raising the price of foreign products.
Who gains and who loses from tariffs?
Domestic producers gain; consumers pay higher prices and buy less; overall surplus decreases due to deadweight loss.
What is the benefit of free trade?
Increases total surplus through lower prices, more choices, economies of scale, and efficient resource allocation.
What is a small open economy?
A country that participates in world trade but is too small to influence world prices.
What are the effects of free trade in exports?
Domestic producers gain surplus and sell more at higher world prices; domestic consumers pay more and buy less.
What are the effects of free trade in imports?
Domestic consumers gain from lower prices and more choice; domestic producers lose sales and surplus.
Why might governments impose trade barriers despite inefficiency?
To protect specific industries, preserve jobs, or respond to political pressures, even if total welfare falls.
What is a quota in international trade?
A quota is a quantity limit imposed by the government on the amount of a good that can be imported.
How does a quota affect the supply in a market?
It reduces total market supply by limiting the quantity of imported goods.
What is the typical result of a quota on market prices?
Prices increase due to restricted supply.
Who benefits from quotas?
Domestic producers benefit as they sell more at higher prices.
What happens to consumer surplus under a quota?
Consumer surplus decreases due to higher prices and reduced availability.
What is the deadweight loss in a quota system?
The portion of lost consumer surplus that is not transferred to any other group, representing inefficiency.
Who might capture area “J” in a quota diagram?
Either surviving importers who sell at higher prices or the government if it charges import licenses.
How does a quota differ from a tariff in terms of government revenue?
A quota does not generate revenue unless the government sells import licenses; a tariff always generates revenue.
What do quotas and tariffs have in common?
Both raise prices and reduce the quantity of imports, benefiting domestic producers.
How is the mechanism of action different between a tariff and a quota?
A tariff raises prices to reduce quantity; a quota limits quantity to raise prices.
What is a domestic subsidy in the context of international trade?
A government payment to domestic producers to lower their costs and increase their competitiveness.
How does a subsidy affect the domestic supply curve?
It shifts the supply curve to the right (or downward), lowering prices and increasing quantity.
How can subsidies support domestic firms without raising prices?
By reducing production costs, firms can supply more at the same world price.
What is the protective effect of a subsidy?
It increases domestic production, reduces imports, and strengthens the domestic industry.
What is the main cost of subsidies?
They impose a financial burden on taxpayers.
How does a subsidy compare to a tariff in terms of consumer prices?
Subsidies keep prices lower, whereas tariffs raise consumer prices.
Why might a government prefer tariffs over subsidies?
Tariffs generate revenue, whereas subsidies require government spending.
In a quota system, what happens to the domestic firm’s revenue?
It increases due to higher prices and greater market share.
Why are quotas and tariffs considered inflationary?
They both raise prices for consumers, contributing to overall inflation.
What is the net effect of using quotas or tariffs on total economic surplus?
Total surplus decreases due to deadweight loss, making the economy less efficient.
