Government Intervention- price controls

what is maximum price

A maximum price (or price ceiling) is a legally imposed limit set by the government, preventing the price of a good or service from rising above a certain level.

what are 3 examples of markets which have the aim to improve factor mobility

• Education fees

•  Rent

•  Public transport

what are 3 examples of markets which have the aim to Improving living standards

• Rent

• Food

• Medicine

• Utility bills

what are 3 examples of markets which have the aim to Tackling monopoly pricing

• Oil

• Mobile data

• Overdraft fees

 

what are the costs for goverment when using subisidies

Cost of doing the subsidy-hight opportunity cost

what are the costs for goverment when using maximum price

cost of enforcing this onto the market-low cost

what is the allocative efficiency of subsidies

Increase, if positive externalities

what is the allocative efficiency of maxiumum price

Decrease, because price set below equilibrium

what are the unintended consequences of subsidies?

Over reliant on subsidies

Over production

Government failure

what are they unintended consequences of maximum price?

Reduced quality

Black markets/shadow markets

Shortage of supply

What are minimum prices?

A minimum price (or price floor) is a government-imposed, legally enforced price control that sets the lowest price a good or service can be sold for, typically set above the market equilibrium.

When are minimum process used?

In a free market, too much is traded because externalities are ignored by the market mechanism. By raising the price there is a contraction along the demand curve.

Too much of a good may be bought in the free market if consumers have too little information about the harm associated with consuming the good. A higher price leads a contraction along the demand curve.

what is the indirect effect on government tax revenue

 increases revenue as for every unit sold they earn the tax

effect on retailer revenue for indirect tax

Decreases as the high price will reduce quantity demanded

effect on efficiency with indirect tax

Price mechanism in use for effective

Effect in giverment tax revenue with a minimum price

no direct tax revenue and can create costs for gov if purchases are more than supply

effect on retailer revenue for minimum price

Most goods for which the govt might want to use a min price are habit forming, so price inelastic demand

So with higher price revenue will rise

effect on efficiency for minimum price

Reduces efficiency due to excess supply

disadvantages of minimum price

No direct tax

Economic inefficiency

Excess supply

Cross border trading and dumping excess supply on black market internationally

Not allocative efficient

Potentially larger revenue for retailors

For guaranteed min price gov needs to buy excess supply which is costly

Potentially complicated to understand

If demand is price inelastic might have little effect