Price Controls and Quotas -Econ 101

What is market intervention?

• A policy imposed by government to prevail over the market forces of supply and demand 

What are price controls?

 Legal restrictions on how high or low a market price may go

What is a price ceiling?

A maximum price sellers are allowed to charge for a good or service; a form of price control 

What is a price floor?

A minimum price buyers are required to pay for a good or service; a form of price control.

When does a price ceiling not cause a shortage?

if its not binding so its above equilibrium price

What are the ways price ceilings create inefficiency?

• give rise to illegal behavior as people try to circumvent them 

• reducing the quantity exchanged below the efficient level

• causing an inefficient allocation of the good among consumers

• forcing people to waste time and effort searching for the good

• causes inefficiently low quality

What is deadweight loss (DWL)?

 The loss in total surplus that occurs when an action or policy reduces the quantity transacted below the efficient market equilibrium quantity 

What does inefficient allocation to consumers mean?

A form of inefficiency in which some people who want the good badly are willing to pay a high price don’t get it, and some who care relatively little about the good and are only willing to pay a low price do get it; often as a result of a price ceiling 

What are wasted resources?

A form of inefficiency in which people expend money, effort, and time to cope with the shortages caused by a price controls 

What does inefficiently low quality mean?

A form of inefficiency in which sellers offer low-quality goods at a low price even though buyers would prefer a high quality at a higher price; often a result of a price ceiling 

What are black markets?

A market in which goods or services are bought and sold illegally, either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price control 

What are the 3 common results of price ceilings?

• A persistent shortage of the good 

• Inefficiency arising from this persistent shortage

• The emergence of illegal, black market activity 

How does a price floor cause inefficiencies?

1. It creates a deadweight loss by reducing the quantity transacted to below the efficient level 

2. It leads to an inefficient allocation of sales among sellers 

3. It leads to a waste of resources 

4. It leads to sellers providing an inefficiently high-quality

• In addition to inefficiency , a price floor leads to illegal behavior as people break the law to sell below the legal price 

What is inefficiently low quantity?

when the quantity of a good or service bought and sold is less than the market equilibrium quantity.

What is an inefficient allocation of sales among sellers?

A form of inefficiency in which sellers who would be willing to sell a good at the lowest price are unable to make sales while sales go to sellers who are only willing to sell at a higher price; often the result of a price floor  

What does inefficiently high quality mean?

 A form of inefficiency in which sellers offer high-quality goods at a high price even though buyers would prefer a lower quality at a lower price; often the result of a price floor

What are the negative side effects of price floors?

• A persistent surplus of the good 

• Inefficiency arising from the persistent surplus

• The temptation to engage in illegal activity, particularly bribery and corruption of government officials