Price Controls (Maximum/Minimum Price) and Market Failure Flashcards
(26 cards)
What is a minimum price?
A minimum price is a legally enforced floor price, set above the market equilibrium, to prevent prices from falling too low (e.g., minimum wage or minimum alcohol price).
How does a minimum price address over-consumption?
It raises the price of goods (like alcohol) to reduce consumption, helping to address negative externalities (e.g., health problems from excessive drinking).
What is the effect of a maximum price?
A maximum price sets a price ceiling, preventing prices from rising too high, often used to make essential goods (like rent or basic foods) more affordable.
What market failure does a minimum price try to correct?
A minimum price helps to correct over-consumption by raising prices, thus reducing the quantity demanded of goods with negative externalities, like alcohol.
What happens when the minimum price is set too high?
It can lead to excess supply, where producers make more than consumers are willing to buy at the higher price, resulting in a surplus of goods.
How does the inelastic demand impact the effectiveness of a minimum price?
If demand is price inelastic, a minimum price may not significantly reduce consumption, because consumers will continue buying despite higher prices.
Why is a regressive effect a problem with price controls?
Price controls, especially minimum prices, can disproportionately affect the poor because they increase the cost of goods that lower-income individuals are more likely to consume, exacerbating income inequality.
How do price controls impact allocative efficiency?
While price controls may correct some market failures, they can lead to allocative inefficiency by distorting market signals, either causing overproduction or underproduction.
What is the relationship between externalities and price controls?
Price controls aim to address negative externalities by adjusting prices to reduce consumption or production that creates social costs (e.g., environmental damage, health issues).
What is a potential drawback of maximum price controls?
If set too low, maximum price controls can cause shortages, as suppliers may be unwilling to produce or supply goods at the capped price, leading to unmet demand.
What is a Black Market?
A Black Market arises when goods are sold illegally, often due to price controls or other regulations that cause goods to be priced too high or too low in the formal market.
How do Black Markets affect the government’s objective?
Black Markets undermine the government’s objectives by bypassing regulations, resulting in lost tax revenue and potentially more dangerous products being sold to consumers.
What can happen if prices are set too high due to maximum price controls?
When prices are too high, it can create an incentive for smuggling, where goods are brought in from abroad to exploit the higher demand at inflated prices.
What happens if the government sets prices too low in a maximum price control?
Excess demand may occur, leading to shortages because suppliers may not be willing to provide the good at the lower price, leaving consumers unable to purchase what they need.
What is the impact on firms when prices are set too low?
Firms may be unwilling to produce or supply goods at the controlled price, which can lead to them leaving the market or reducing production, causing unemployment and further supply shortages.
How can price inelasticity impact maximum price controls?
If demand for a good is inelastic, even a maximum price set below equilibrium may not significantly reduce consumption or solve the over-consumption problem.
What does shortage mean in the context of maximum price controls?
A shortage occurs when the quantity demanded exceeds the quantity supplied at the controlled price, leading to unmet demand and inefficient allocation of resources.
Why might individuals turn to alternative suppliers in response to price controls?
Consumers may seek alternative suppliers (e.g., black markets) if the official market does not meet their demand or if the government’s price controls make goods unavailable or more expensive.
What is the issue with governmental price setting in terms of market efficiency?
Price controls (whether minimum or maximum) distort the market equilibrium, potentially leading to allocative inefficiency, where goods are either over or underproduced.
What impact can price controls have on social welfare?
Price controls can lead to unintended consequences like shortages or excess demand, which negatively affect social welfare by causing inefficiencies and creating inequality in access to goods.
How does a shortage caused by price controls lead to Black Markets?
When a shortage occurs (due to price controls), consumers are willing to pay a higher price than the controlled price, creating a Black Market where sellers exploit this demand by charging more, often with unknown quality risks.
What dangers do Black Markets pose to consumers?
Black Markets can exploit consumers by offering goods at higher prices and varying quality, putting consumers at risk, as they may not get the expected value or could be overcharged.
Why is enforcement crucial when price controls are in place?
Enforcement is needed to ensure that sellers (e.g., landlords) do not charge above the controlled price, as failure to enforce can lead to market distortions and exploitation through Black Markets.
What happens if the price control is set too low?
Setting the price too low leads to massive excess demand, resulting in a shortage where not enough goods are available to meet consumer needs, often pushing them into Black Markets.
