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EC190 Chapter 4

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Jon Tomlinson

on 5 May 2014

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Transcript of EC190 Chapter 4

EC190 Survey of Economics
Chapter 4: Markets in Action
UNOH Spring 2014
Jon C. Tomlinson, Ph.D.

Changes in Market Equilibrium
Changes in Demand:
See Exhibit 1, page 102

Changes in Supply:
See Exhibit 2, page 103
Can the Laws of Supply and Demand be Repealed?

Can the Laws of Supply and Demand be Repealed?
Price Ceilings - a legally established maximum price a seller can charge

Rent Controls

Gasoline Price Ceiling

Always result in a shortage. See Exhibit 5, page 106
The laws of supply and demand cannot be repealed.
Government policies to control markets have predictable consequences (and ultimately fail).
There are situations in which the market mechanism fails, and thus requires intervention (i.e. government).
Price Floors - a legally established minimum price a seller can be paid

Minimum Wage

Agricultural Price Supports

Always result in a surplus. See Exhibit 6, page 108
Can the Laws of Supply and Demand be Repealed?
Rigging the Market for Milk, page 110
1. Draw a supply and demand graph to illustrate the problem described in the case study, and prescribe
your own solution.
2. Which proposal do you think best serves the interest of the small farmers and why?
Many small dairy farmers might prefer proposal 4 because the buyout program provides the cash
required to start a new business.
3. Which proposal do you think best serves the interest of the consumer and why?
Consumers, who are also taxpayers, should prefer proposal 2 which eliminates the price support
program. This action would reduce the price of milk and eliminates taxes required to purchase
unsold milk or herds under the buyout program.
4. Which proposal do you think best serves the interest of a member of Congress and why?
Since each of these proposals has been enacted by Congress except proposal 2, the only clear
conclusion is that Congress does not prefer the price system (solution 4). The price support for
milk is a price floor, PS , set above equilibrium price, PE , that would be set by the price system
without government intervention. The result is a surplus of milk which is purchased by the
government using taxpayer dollars.
Market Failure
A situation in which market equilibrium results in too few or too many resources used in the production of a good or service.
This inefficiency may justify government intervention.

4 cases of market failure: lack of competition, externalities, public goods, income inequality
Market Failure
Lack of Competition
Think monopolies/oligopolies, collusion
U.S. antitrust laws fight this

See Exhibit 7, page 113
Market Failure
A cost or benefit imposed on people other than the consumers and producers of a good or service.
Spillover/neighborhood effects

Pollution, Exhibit 8a, page 115
"Corrected by regulations, taxes

Vaccinations, Exhibit 8b, page 115
Regulations, special subsidies
Market Failure
Public Goods - a good or service with 2 properties: (1) users collectively consume benefits, (2) there is no way to bar people who do not pay (free riders) from consuming the good or service.

Ex: National Defense, National Parks
Market Failure
Income Inequality - WHAT?
Can Vouchers Fix Our Schools?
Full transcript