Price Controls

Question 1

Maximum PRICE CONTROL meaning?

Answer 1

“Ceiling price”
- Suppliers cannot charge above

Question 2

Minimum PRICE CONTROL meaning?

Answer 2

“Floor price”
- Consumers cannot legally buy the goods for less than the stated price.

Question 3

What does a Minimum Price Control cause in terms of supply and demand?

Answer 3

Excess supply

Question 4

What does a Maximum Price Control cause in terms of supply and demand?

Answer 4

Excess demand

Question 5

Why are Maximum prices used?

Answer 5

To encourage the consumption of a merit good/service, by making the good or service more affordable.

-Solve PE in consumption

Question 6

Why are Minimum prices used?

Answer 6

1) To discourage the consumption of Demerit goods/services, by making it too expensive.

• Solving NE in consumption.
• Internalise external costs

2) Help protect industries that are threatened by the price volatility of the market.

Question 7

Impacts of Minimum Price Controls?

Answer 7

1) PED: inelastic ~> consumption remains same.

2) Regressive ~> goods will take a larger proportion of income off the poor ~> burdening the poor.

3) Black Markets: (Dangerous Consumption) ~> Gov. failure? (more damaging to society)
^Loss of tax revenue^

4) Set at the right level:
Too High ~~> producer suffers too much ~~> shutdown.
¬ BUT if PED Inelastic ~~> increased rev?

Too Low ~~> QD doesn’t reduce to social opt.
¬ Externalities aren’t perfectly internalized.

5) Intervention Buying costs

Question 8

Impact of Maximum Price Controls?

Answer 8

1) Shortages (Not everyone can find be supplied) ~~> decreased nmbr of accommodation = Gov. failure?

2) Black Markets (Exploited?) ~~> Gov. failure?

3) Enforcement cost

4) Setting the right level: Too high ~~> not enough encouragement for consumption.

Too low ~~> extensive shortages

5) Subsidy cost (caused by Self-inflicted ~>GOV. failure)

6) Lower-quality goods/services