Transcript Chapter 6
Chapter 6 Market Efficiency and Government Intervention Effectiveness of Price Floors • To be effective, a price floor must be set above the equilibrium price. • Price floors in one market may effect outcomes in other markets. Price Ceiling • Government mandated maximum price above which legal trades cannot be made • Price ceiling is below equilibrium price. Rent control Impacts of Price Ceilings • Shortage sustained • Fewer exchanges • Non-price rationing schemes First come first served • Buying & selling at prohibited prices Black markets • Tie in Sales Pay certain amount for rent of the house and an amount for renting the refrigerator Quotas • Maximum quantity of a good or service that can be traded over a specific period of time. Used when the government determines the equilibrium quantity would not be in society's best interest • For example: International trade • Supply curve becomes vertical at this point Figure 6.9 The Effect of a Quota on the Market for Laptop Computers The Effects of a Quota • Quotas result in: A transfer of consumer surplus (prices are now higher ) to producer surplus Deadweight loss Can we do it? (number 12) • Draw a supply and demand curve for vitamins, with the equilibrium price at $10.00 per bottle. Suppose that the government believes that this price is too high to promote health among its citizens, and installs a price ceiling of $8.00 per bottle. Show the effect of this policy on consumer and producer surplus, and label any deadweight loss created by the policy. Which consumers are better off with the price ceiling in place? Are some consumers worse off? If so, why? Concluding Thoughts on Market Efficiency • Other potential sources of inefficiency: Monopoly Power • One seller • Prices are higher and quantities produced are lower Externalities • Negative and positive Public Goods and Common Resources • When do you stop using a free good? Chapter 6 homework • Questions 6, 10, 14, and 16