Chapter 5 - Price Controls and Quotas

ECON:1100 Final Exam

What are price controls?

they are legal restrictions on how high or low a market price may go

What are two of the main price controls?

price ceilings and price floors

What are price ceilings?

they are the maximum price sellers are allowed to charge

What are price floors?

they are the minimum price buyers are allowed to pay for a good

What do price controls cause?

deadweight loss

What is deadweight loss?

it is the loss in total surplus that happens when the amount transacted below efficient equilibrium quantity is reduced

Where is deadweight loss on a graph, in terms of price controls?

It is the triangle where total surplus would be

Nonbinding

if a price is set above equilibrium it will have no effect

Binding or effective

only price ceilings set below equilibrium will have an effect

What are some predictable side effects of these price controls?

• inefficiently low quality

• wasted resources

• inefficient allocation to customers

• black markets

Why is inefficiently low quality a side effect of price controls?

sellers have more consumers than goods at a controlled price and in response there is reduced quality and service

Why are wasted resources a side effect of price controls?

money is expended as well as effort and time to cope with shortages caused by PCs

What are shadow/black markets?

when goods are bought and sold illegal, as a whole they make society worse

Why are there price ceilings?

• they benefit some people

• when they have been in effect for a while they have an affect on buyers, they have adapted

• gov. officials usually do not understand supply and demand analysis

What does controlling quantities mean?

sometimes governments control quantity instead of price

What is an example of a controlling quantity?

quota

What is a quota?

it is a limit on quantity of a goos that can be bought or sold

Quota limit

the total of a good under a quota or quantity control that can be legally transacted

License

the right to supply a good, it is given by the government

The “wedge”

it is the difference between the demand price and the supply price at the quota limit

How does a quota show up on a graph?

it is a vertical line further left than the equilibrium, it creates a wedge between consumer and producer surplus

What type of cost is there on society with quantity controls?

• deadweight loss

• incentive for illegal activities