Government Set Prices, Tariffs, and Subsidies

The maximum legal price a seller may charge for a product.
Aims to help consumers afford essential goods and services that are too expensive in equilibrium.
Only binding if set below the equilibrium price.
If binding, it leads to a situation where quantity demanded (Qd) is greater than quantity supplied (Qs), resulting in a shortage.
The market remains in disequilibrium.
Creates a rationing problem: how to allocate the large quantity demanded to the small quantity supplied.
- Possible rationing methods include coupons.
Black markets may emerge because many buyers are willing to pay more than the price ceiling (Pc). These are markets where the product is illegally bought and sold.

A specific type of price ceiling, also known as a maximum price, applied to rental housing.
Intended to protect low-income families from increasing rents, making housing more affordable.
Demand Side: Increases the demand for rental housing.
Supply Side: Makes rental housing less attractive for landlords.
Short-run effects: Owners may sell rental units, but substantial changes are limited.
Long-run effects: Landlords may invest in opportunities other than housing, such as office buildings or malls.
Rent controls distort market signals, leading to misallocation of resources, with too few resources allocated to rental housing and too many to alternative uses.

In equilibrium, consumer surplus and producer surplus exist.
With rent control, consumer surplus changes, producer surplus decreases, and a deadweight loss is created, indicating a loss of total surplus.

The minimum legal price a seller may charge for a product.
Aims to help workers earn a better wage.
Only binding if set above the equilibrium price.
If binding, the market remains in disequilibrium, with quantity supplied (Qs) being greater than quantity demanded (Qd), resulting in a surplus.
Minimum wages are an example of a price floor or a minimum price.

Intended to protect workers because the equilibrium wage is considered too low.
An increase in the supply of labor occurs as workers who were not in the market at a lower wage now enter at the higher minimum wage.
Unemployment results from the minimum wage.

In equilibrium, consumer surplus (firms) and producer surplus (workers) exist.
With a minimum wage, consumer surplus decreases, producer surplus changes, and a deadweight loss is created, indicating a loss of total surplus.

With free trade, the domestic price cannot differ from the world price (Pw).
Imposing a tariff increases the price from the world price (Pw) to a new price (Pt).
The government gains revenue from tariffs.

Decline in consumption: Consumption decreases as consumers pay more due to the tariff.
Increased domestic production: Domestic producers receive a higher price (Pt) per unit, increasing output.
Decline in imports: Hurts foreign producers, and the number of imports decreases.
Tariff revenue: A transfer of income from consumers to the government.

Foreign firms earn less and buy fewer domestic exports.
Domestic export industries cut production and release resources.
Promotes expansion of inefficient industries and contraction of efficient industries.
Reduces efficiency and the world’s real output because resources move in the wrong direction.

Imposing a quota increases the price from the world price (Pw) to a new price (Pt).
The area between the world price and the new price goes to foreign producers.

The cost to consumers is greater than the gains to producers.
Protection raises prices.
Prices of imports increase.
Higher import prices lead to an increase in demand for domestically produced goods.
Prices of domestically produced goods increase because import competition declines.
Gains that trade barriers create for protected industries and their workers come at the expense of a greater loss to the economy, resulting in economic inefficiency.

Subsidies are a negative tax where the government gives money to consumers or producers.
These are goods that are underproduced.
The market is in equilibrium at a certain point.
The subsidy shifts the supply curve to the right.
A new equilibrium is reached with a lower market price and increased quantity.
The cost to the producer at the new quantity is the price plus the subsidy.