Cost of Interfering with Market Forces Assignment PDF
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Added on 2021-07-28
Cost of Interfering with Market Forces Assignment PDF
Added on 2021-07-28
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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
-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
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
-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)
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