Ask a question from expert

Ask now

Cost of Interfering with Market Forces Assignment PDF

11 Pages978 Words122 Views
   

Added on  2021-07-28

Cost of Interfering with Market Forces Assignment PDF

   Added on 2021-07-28

BookmarkShareRelated Documents
ECON 1101 – Week 7
Government Intervention: The Cost of Interfering with Market
Forces
Markets aren’t able to always guarantee an equal distribution of income
and opportunities
- In certain situations, the government might conclude that the price
consumers are paying is unfairly high...
5.1 Price Ceiling
Price Ceiling:
A price ceiling policy specifies a maximum allowable price in a given
market.
If the market equilibrium price = $100 and the price ceiling is set to $80,
the market will not be able to reach its natural equilibrium instead will
be forced to stop at $80
(a price ceiling of > $100 would have no impact)
Is the market better off with a price ceiling?
The results from the price ceiling:
- Forces the price down, effectively creating excess demand
Cost of Interfering with Market Forces  Assignment PDF_1
- The buyers with the highest willingness (rationing rule) can acquire
the good at a lower price their surplus increases compared with
the surplus they can get in the absence of the price ceiling
oBut, certain consumers will be left unserved due to the result
of the reduction in price that occurs after the introduction of
the price ceiling. The reduction in price reduces the quantity
that producers are willing to supply
- Producers are worse off as their initial surplus is greater than if
there were to be a price ceiling
The introduction of any price ceiling decreases the total economy surplus.
The amount by which the total surplus decreases due to the price ceiling
is known as deadweight loss
Deadweight Loss:
Deadweight loss is the loss in economic surplus due to the fact that
the market is prevent from reaching equilibrium price and quantity
where marginal benefit equals marginal cost
If the government wanted to help low-income households, handing a
direct lump sum would be more efficient – tinkering with the market
reduces the surplus
Cost of Interfering with Market Forces  Assignment PDF_2
5.2 Price Floor
Governments may decide that prices are too low, and producers need to
be protected by the price reaching its equilibrium levels
Price Floor
A price Floor is a minimum allowable price imposed by the
government

If the government imposes a price floor above the equilibrium price, the
market will be forced to settle at the price level dictated by the price floor
Price floors:
- Generate excess supply
- Producers who sells are able to benefit from the higher price
- The producers who cannot sell experience a sharp decline in surplus
- Consumers are worse off (paying higher prices)
- Introduction of price floor decreases the total economy surplus
oAmount by which the surplus drops = deadweight loss
Cost of Interfering with Market Forces  Assignment PDF_3
- Consumers experience a loss in surplus and they would be willing to
pay the winners (the producers @ a higher price) in exchange for
the elimination of this policy A PARETO IMPROVING TRANSACTION
5.3 Taxation
Unlike the price ceilings + floors – a tax generates tax revenues that
can be used to redistribute wealth within a society
This improves the distribution of income and opportunities across different
population groups
It is not important who ultimately pays the tax to the government. What is
important in determining who bears the cost of taxation is the relative
responsiveness of demand and supply changes in price (due to the tax)
Cost of Interfering with Market Forces  Assignment PDF_4

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
Price Ceiling and Price Floor - Question Answers
|3
|739
|14

Assignment on Microeconomics PDF
|11
|1606
|52

Economic Equilibrium Assignment
|17
|605
|132

Economics Assignment: Price Ceiling, Price Floor, and Monopoly Market
|18
|4192
|92

Supply and Demand Analysis of Milano Luxury Bath Fittings
|9
|1003
|441

Question 1 In the given scenario, there would be a decrease in
|2
|375
|30