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Chapter 5 ,7

ECON 101 Chapter 5 ,7:

7 pages83 viewsFall 2018

Department
Economics
Course Code
ECON 101
Professor
Mitchell Dudley
Chapter
5 ,7

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Chapter 5 and 7: Government Controls
Governments generate revenue by taxing
5 basic price control: price control (upper and lower limits), quotas, taxes, subsidies
Price Controls
Want to make price more fair/accessible for either producers or consumers
Price ceilings (upper limit)
Price ceiling: the maximum price that
the government is allowing the market to
go to (help consumers)
Nonbinding: no reason to set a price
ceiling higher than or equal to the market
equilibrium
Gov would set as preventative
measure in case price rises too
fast, or if originally was binding
limit and price decreases
Binding: market is being pushed away
from equilibrium (price ceiling is under
the equilibrium)
Qty demand > qyt supply
Creates shortage
Supplies can only produce at A, consumers can only demand at B
Short-sighted response
E.g. decrease price of apartments to make it more affordable, but results in
creating a shortage for those same people trying to help
Price ceilings cause inefficiency
Inefficient: there are missed opportunities to make some people better off without
making other people worse off
Price ceilings often lead to inefficiency in the forms of:
Inefficiently low quantity (not enough supplied)
Inefficient allocation to consumers
Demand curve is downward sloping (those who want the item/willing to
pay the most are at the top)
All the way until point B is who wants to buy, but don’t know who actually
gets to buy because there is not enough apartments for everyone to buy
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The person who is willing to pay the least is more likely to get the
apartment (higher willingness to pay at lower price, despite lower
consumer surplus), those who are willing to pay more are less likely to get
the apartment (“don’t have the time to wait”, despite higher consumer
surplus)
In a market at equilibrium, order does not matter because everyone who
wants one at that price gets it
Wasted resources
What to do with the other 400,000 apartments that are not sold
Free market suggests residential use
Could be changed into office, rented out, etc
Inefficiently low quality
Less revenue in supply results in lower quality
e.g. lower maintenance, cannot afford janitors
Market will try to resolve inefficiency via black markets
Welfare Effects of a Price Ceiling
Taking out a higher willingness to pay + consumer surplus and that apartment they were
willing to buy, replaced with lower willingness to pay + consumer surplus
Measuring excess value: the amount of extra enjoyment and value I get from this good
given the amount I pay
Losing excess value because of inefficient allocation
Consumer surplus can only be generated from units that are actually exchanged in the
market
No such thing as negative surplus, simply do not purchase (unless somebody
physically forced you to buy a good that you do not want at that price)
Deadweight loss: loss in total surplus
Not always that triangle in different scenarios (Ch. 16)
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