Micro 16 - Price Controls Flashcards
Use of price controls
> Another measure the gov. can use to influence the market is price controls.
Other measures to correct market failure = indirect tax, subsidies, direct government provision and regulation.
Price Controls - definition
> Regulation imposing a maximum or minimum price that can be charged for specific goods or services.
Maximum price controls - definition
> Regulations setting a ‘ceiling price’ in the market for a good or service whuih suppliers can’t charge.
Minimum price controls - definition
> Regulation setting a ‘floor price’ in the market for a good or service. Consumers can’t legally buy the good or service for less than the stated price.
Illustrating price floors
> Discourages consumption of demerit goods. Negative externality.
At P1-QI there;s an over-consumption so by imposing a min. price above the equilibrium ( a floor price) we will contract demand so quantity consumed in the market will fall from Q1 to Q*, the socially optimal level of output.
Solves over-consumption or over-production and gets allocative efficiency and thus, welfare will be maximised.
Issues with minimum price - list
- Price Inelastic Demand.
- Regressive.
- Black market.
- Set at right level?
- Surplus of supply.
Issues with minimum price - price inelastic demand
> The fall in Qd will be proportionally less than the increase in price.
May not fall enough to solve the market failure.
Issues with minimum price - regressive
> Can be seen as regressive in its nature.
>Could burden the poor, widening income inequality.
Issues with minimum price - black market
> More dangerous and questionable in the black markets.
Loopholes: People in Scotland could buy alcohol in England and bring it back.
Tax revenue lost if bought from illegal sources.
Issues with minimum price - set at the right level?
> If set higher than solving failure, producers may be impacted leading to unemployment.
However, producers will see increase in revenue if price inelastic.
The issues of regressive and black market are more severe if set too high, guaranteeing gov. failure.
If too low then quantity consumed will not fall to the socially optimal level.
Issues with minimum price - surplus of supply
> Gov. could buy surplus.
Unlikely if demerit good.
Price floor to protect declining industry and then gov. buy excess supply.
Illustrating price ceilings.
> By imposing a price ceiling below the equilibrium price, we are promoting equity, encouraging more consumption of essential goods/services.
There’s max. price control on rent in NY and Berlin. Price exclusion shouldn’t exist.
Contraction in supply, but extension in demand so there’s an excess demand of Qd minus Qs (shortage).
Issues with maximum price - list.
- Shortage will be created.
- Black market.
- Enforcement.
- Setting right level.
- Cost.
Issues with maximum price - shortage will be created
> There’s a contraction of supply, but extension in demand so the government creates an excess demand.
Shortage, inefficiency in the market.
Issues with maximum price - black market
> There will be many in the excess demand who are willing to consume from black market to get it for more than max price.
Dangerous.
Can be exploited.
Quality may fall if price falls.
