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Why would governments attempt to control prices?
Moral or political cases from buyers (ex. Rent control), or moral/political cases from buyers (ex. Raise minimum wage)
When is a price ceiling binding?
when it is below the equilibrium price
When is a price ceiling non-binding?
when it is above the equilibrium price
How can price ceilings cause inefficiencies in competitive markets?
When a price ceiling is binding, it prevents the market forces from adjusting the upwards until price until demand=supply
Deadweight Loss (DWL)
A measure in $ of the total surplus lost by the market when a price control is imposed.
Negative consequences of price ceilings
Costs that result from addressing shortages, lower quality, shadow markets.
How can price floors create inefficiencies in competitive markets?
If a price floor is binding, it prevents the market forces from adjusting the price downwards until demand=supply
Negative Consequences of price floors
Costs that result from addressing surpluses, shadow markets, inefficiently high quality