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Market Failure
Situations in which the assumption of efficient, competitive markets fails to hold
Price Control
A regulation that sets a maximum/ minimum legal price for a particular good
Price Ceiling
A maximum legal price at which a good can be sold
Deadweight loss
A loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity
Price Floor
A minimum legal price at which a good can be sold
Subsidy
A requirement that the government pay an extra amount to producers or consumers of a good
The government might initiate a minimum wage to
lower tax burdens.
change the distribution of surplus.
get more tax revenue from foreigners.
please businesses.
change the distribution of surplus.
Positive Analysis
A matter of Facts
Normative Analysis
A matter of values and opinions
Even if a market is competitive and efficient, the _____ of surplus may not be fair.
distribution
An effective price _____, which is below the equilibrium price, creates a
_____ of the good.
ceiling, shortage
Price controls can be divided into two opposing categories: price _____ and price ____
Ceiling, floor
When a tax is imposed on sellers, at any given market price, sellers will now produce
the same quantity as before the tax.
a larger quantity than they would have before the tax.
a smaller quantity than they would have before the tax.
a smaller quantity than they would have before the tax.
When a tax is imposed on sellers,
the equilibrium quantity is lower and the equilibrium price is lower.
the equilibrium quantity is higher and the equilibrium price is higher.
the equilibrium quantity is higher and the equilibrium price is lower.
the equilibrium quantity is lower and the equilibrium price is higher.
the equilibrium quantity is lower and the equilibrium price is higher.
When there is a tax imposed on buyers,
prices are higher than with a tax on sellers.
prices are lower than with a tax on sellers.
quantity is lower than with a tax on sellers.
the outcome is the same as a tax on sellers.
the outcome is the same as a tax on sellers.
An effective milk price floor, which is above ______ (above/below) the equilibrium price, will result in a _____ (lower/higher) quantity demanded but a _____ (smaller/larger) quantity supplied.
Above
Lower
Higher/Larger
With a _____, the quantity supplied and demanded increases, and the government spends money.
shortage
subsidy
tax
surplus
Subsidy
When a tax is imposed on buyers or sellers, the actual amount that buyers pay and sellers receive is the same no matter who pays the tax.
True
False
True
When producers receive a subsidy,
the real price they receive for each unit sold is lower than the market price.
the real price they receive for each unit sold is higher than the market price.
the real price they receive for each unit sold is the same as the market price.
the real price they receive for each unit sold is higher than the market price.
When producers receive a subsidy,
the demand curve falls.
the demand curve is unchanged.
the demand curve rises.
the demand curve is unchanged.
When producers receive a subsidy, the equilibrium
quantity increases and the equilibrium price increases.
quantity decreases and the equilibrium price increases.
quantity decreases and the equilibrium price decreases.
quantity increases and the equilibrium price decreases.
quantity increases and the equilibrium price decreases.
When producers receive a subsidy, the new supply curve is drawn _____ (one word) the original supply curve.
Below
How do governments use subsidies?
Multiple select question.
As an alternative to price controls
To offset price controls
To discourage the production and consumption of a particular good or service
To encourage the production and consumption of a particular good or service
To penalize certain groups without generating a shortage or an excess supply
To benefit certain groups without generating a shortage or an excess supply
As an alternative to price controls
To encourage the production and consumption of a particular good or service
To benefit certain groups without generating a shortage or an excess supply
Price controls can do which of the following?
Decrease quantity demanded and increase quantity supplied
Cause a shortage
Lower equilibrium price
Cause excess supply
Increase quantity demanded and increase quantity supplied
Increase quantity demanded and decrease quantity supplied
Decrease quantity demanded and increase quantity supplied
Cause a shortage
Cause excess supply
Increase quantity demanded and decrease quantity supplied
Taxes and subsidies can do which of the following?
Cause the market to collapse
Prevent the market from reaching equilibrium
Decrease quantity supplied and demanded
Increase quantity supplied and demanded
Decrease quantity supplied and demanded
Increase quantity supplied and demanded
The traditional diet of the citizens of the nation of Ironia includes a lot of red meat, and ranchers make up a vital part of Ironia's economy. The government of Ironia decides to support its ranchers through a price floor, which it will maintain by buying up excess meat supplies. The table below shows the supply and demand schedule for red meat; quantities are given in thousands of pounds.
How many thousands of pounds of meat would you recommend that the government purchase to keep the price at $4 per pound?
How much money should the government budget for this program?
At $4 per pound, quantity supplied is 60,000 pounds, but quantity demanded is only 35,000 pounds, creating a surplus of 25,000 pounds. To maintain the price floor, the government should purchase 25 thousand pounds of meat.
Surplus to be purchased = 25,000 pounds (from previous calculation).
Price per pound = $4.
Total cost = 25,000 × $4 = $100,000.
