Chapter 6 & 7

Question 1

What do price controls do?

Answer 1

Attempt to set prices through government involvement in the market

Question 2

What is a price ceiling?

Answer 2

A legally established maximum price for a good or service

Question 3

What happens when a binding price ceiling is established?

Answer 3

• The quantity demanded by consumers rise as price drops (law of demand)
• The quantity supplied decreases as producers are less willing to sell (law of supply)
• This results in a shortage
• A shortage is usually corrected by the market by an increase in price, which is not possible because of the price ceiling

Question 4

What are the unintended consequences that follow a price ceiling being established?

Answer 4

• Smaller quantity of good supplied
• Black markets are established

Question 5

When are price ceilings non-binding?

Answer 5

When the price ceiling is above the equilibrium price (still regulated by supply and demand)

Question 6

When are price ceilings binding?

Answer 6

When they are lower than the price determined by the market

Question 7

Where is the black market price when a price ceiling is established?

Answer 7

Quantity supplied at shortage, vertically follow to demand curve

Question 8

What are the effects of price ceilings in the long run in reference to supply and demand?

Answer 8

• Supply becomes more elastic as producers will produce less when prices are low
• Demand becomes more elastic because consumers will want to buy more when prices are low
• Greater shortage

Question 9

Describe the graph of rent control (imposing price ceiling)

Answer 9

Question 10

Describe the graph when price gouging laws are put in place

Answer 10

Question 11

What are the unintended consequences that follow the establishment of a price floor?

Answer 11

• A smaller demand for the good
• Black market establishment

Question 12

When are price floors non-binding?

Answer 12

Lower than the equilibrium price determined by market

Question 13

When are price floors binding?

Answer 13

When it is higher than the price determined by market

Question 14

Where is the black market price when a price floor is established?

Answer 14

Quantity supplied, vertically follow to demand curve

Question 15

What are the effects of price floors in the long run?

Answer 15

• Supply becomes more elastic as more producers are more willing to sell at high prices
• Demand becomes more elastic as consumers will find substitutes for the good
• Greater surplus

Question 16

Describe the graph when minimum wage laws are put in place

Answer 16

Question 17

What are externalities?

Answer 17

• The costs or benefits of a market activity that affect a third party
• Type of market failure

Question 18

When does a market failure occur?

Answer 18

When there is an inefficient allocation of resources in a market

Question 19

What are social costs?

Answer 19

The sum of the internal costs and external costs of a market activity

Question 20

What are internal costs?

Answer 20

The costs of a market activity paid only by an individual participant

Question 21

What are external costs?

Answer 21

The costs of a market activity imposed on people who are not participants in that market

Question 22

When does a third-party problem occur?

Answer 22

When those not directly involved in a market activity experience negative or positive externalities

Question 23

What is the social optimum?

Answer 23

The price and quantity combination that would exist if there no externalities

Question 24

How are negative externalities corrected?

Answer 24

Government requires the firm to internalise an externality and account for the external costs to society that occur as a result of its actions

• overproduction
  eg. taxes

Question 25

How are positive externalities corrected?

Answer 25

Government encourages the _consumers to internalise the externality_ eg. subsidies - insufficient market demand

Question 26

What is Coase Theorem and what are its conditions?

Answer 26

_Interested parties will bargain to correct externalities_ - If there are no barriers to entry - If property rights are clearly defined Property rights give the owner the ability to exercise control over a resource

Question 27

What is an excludable good?

Answer 27

A good where it is _possible to prevent consumers who have not paid_ for it from having access to it

Question 28

What is a rival good?

Answer 28

A _good that cannot be enjoyed by more than one person_ at a time

Question 29

What are the characteristics of private goods?

Answer 29

- Rival and Excludable eg. watches

Question 30

What are the characteristics of club goods?

Answer 30

- Nonrival and Excludable eg. Netflix

Question 31

What are the characteristics of a common-resource good?

Answer 31

Rival and Non-excludable eg. Large shared popcorn at the movies

Question 32

What are the characteristic of a public goods?

Answer 32

Nonrival and Non-excludable eg. street lights

Question 33

What is cost-benefit analysis?

Answer 33

A process used to determine _whether the benefits of providing a public good outweigh the costs_

Question 34

What is the tragedy of the commons?

Answer 34

- _Occurs when a good that is rival but non-excludable becomes depleted_ - Due to overuse

Question 35

What are the possible solutions to the tragedy of the commons?

Answer 35

- Cap and trade: curb pollution by creating a system of emission permits that are traded in an open market - Carbon pricing - Regulations

Question 36

When does the free-rider problem occur?

Answer 36

_Whenever someone receives a benefit without having to pay for it_

Question 37

What is a price floor?

Answer 37

A legally established _minimum price_ for a good or service

Question 38

What happens when a price floor is established?

Answer 38

- _Quantity demanded drops_ as less buyers are willing to buy at a higher price - _Quantity supplied rises_ as more suppliers are willing to sell at a higher price - This leads to _surplus_ - _Usually corrected_ by increasing price but this is restricted

Question 39

What will consumers do in the long run after a price ceiling is introduced?

Answer 39

Look for substitutes