Price Controls

Question 1

What is a price ceiling?

Answer 1

A legal maximum on the price at which a good can be sold

Question 2

What is a price floor?

Answer 2

The legal minimum at which a good can be sold

Question 3

Why might a government try to impose a price control?

Answer 3

Goods are too expensive or too inexpensive

Question 4

What does it mean if a price control is binding?

Answer 4

It means a ceiling is below the equilibrium, or that a floor is above the equilibrium, and that there is consequently a shortage or surplus

Question 5

A binding price ceiling induces what in a competitive market?

Answer 5

shortage

Question 6

a binding price floor induces induces what in a competitive market?

Answer 6

surplus

Question 7

What mechanism causes a surplus?

Answer 7

A too high price floor means the consumer demand for goods does not rise proportionally to the supply, which is itself influenced by the high price. Therefore, producers are unable to sell the large quantity, causing a surplus

Question 8

What mechanism causes a shortage?

Answer 8

A too low price ceiling means the supply of goods produced cannot rise proportionally to the demand for them, as firms have no incentive to produce more for the given price. Some people cannot buy the goods as there are simply not enough.

Question 9

What methods of rationing are used when there is a shortage?

Answer 9

Long lines, first-come-first-serve personal biases and connections, bribes

Question 10

How do free markets ration goods?

Answer 10

With prices; anyone who wants to pay the market price gets a good

Question 11

What rationing mechanisms are available during a surplus?

Answer 11

Appealing to personal biases of buyers, personal connection