Price Control, Government Intervention and Unintended Consequences Flashcards
(64 cards)
What are the two reasons governments intervene in a market?
To help consumers To help producers
What is it called when the government sets a price that is different to the equilibrium price?
Price control
When do the government help consumers?
When they perceive the price to be too high
How does the government help consumers?
They put a price ceiling. This is a disequilibrium price.
What is a price ceiling?
A price that by law you cannot go above
What are the necessary conditions of a price ceiling?
It must be set below the PE
What happens if the price ceiling is set above the PE?
Nothing, in this market PE will prevail
When do the government help producers?
When they perceive the price is too low
How do the government help producers?
They put a price floor. This is a disequilibrium price.
What is a price floor?
A price that by law you cannot go below
What are the necessary conditions of a price floor?
It must be set above the PE
What happens if the price floor is set below PE?
Nothing happens, in this market PE will prevail
When their is a price ceiling set, is there an equilibrium between Qd and Qs?
No, they are in disequilibrium. Qd > Qs
What are the five unintended consequences of a price ceiling?
- Excess demand or shortage
- Line up for the product
- Dead weight loss
- Black market
- Search activity
What is it called when Qd > Qs?
Shortage, or excess demand
Will shortage last?
Yes, as long as the government is in control
Why does excess demand occur with price ceilings?
Producers reduce their quantity supplied while quantity demanded increases as the price is lowered. Therefore quantity demanded is greater than quantity supplied and there is shortage.
Do the government mean to create shortage?
Obviously not. It is the first unintended consequence.
What mechanisms can to government put in place to combat shortage?
Put in place other non-market mechanisms such as queing (putting people on waitinglists) or rationing (sharing the product in some way between customers).
What else can the government do to reduce shortage?
The governemnt can subsidize the product. This will shift the supply curve to the right and reduce excess demand.
What is the downside of subsidies?
The taxpayers are the ones subsidising the consumers of the good when they may not consume the good themselves.
What is consumer surplus?
The difference between how much consumers are willing and able to pay for a good or service and the amount they actually pay.
How can you calculate consumer surplus from a graph?
The area above the PE, below the demand curve
What is the producer surplus?
It is the difference between the minimum amount a producer is willing to receive and the actual amount they receive.
