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Government Intervention in the Market --- Price Ceiling/Price Floor

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Ciaran Fitzpatrick

on 6 September 2012

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Transcript of Government Intervention in the Market --- Price Ceiling/Price Floor

Government Intervention Price Controls:
Setting of prices by Government or Private organizations so that prices cannot adjust to the market clearing price We will examine two types:
Price Floor
Price Ceiling Price Ceilings Price Ceiling
Setting a legal maximum price

Price charged by firms cannot be higher than price ceiling or maximum price Non-constraining Price Ceiling:
Price is set above Market Clearing Price (Equilibrium)
Ineffective because price control will not have effect on the market Constraining Price Ceiling:
Price is set below Market Clearing Price
Effective Price Ceiling
Price must be set below Market Clearing Price in order for a Price Ceiling to be effective What do you think are some of the implications of a Price Ceiling? Consequences of Price Ceilings Shortages:
Quantity Demanded is greater than Quantity Supplied Smaller Quantity Supplied & Sold Under allocation of Resources to the good resulting in Allocative Inefficiency
Consumers are worse off because there is less than the optimal of the good being produced Non-price rationing:
First come first served --- waiting in lines
Distribution of coupons, only allowing them to purchase a fixed amount of the good.
Favoritism --- producers sell goods to their prefered customers Black Markets Price Floor Price Floor
Legally set minimum price

In order for a Price Floor to have an impact, it must be set ABOVE the equilibrium price Quantity supplied is greater than the Quantity Demanded
Creates a SURPLUS Consequences Surpluses Smaller Quantity Demanded and purchased Firm Inefficiency
Firms with higher costs of production are able to survive Overallocation of resources Illegal sales at Prices below Price Floor Can you think of any examples? Minimum wage Used in agricultural Industry Buffer Stock Schemes Buffer Stock Schemes
Special type of commodity agreement intended to limit the fluctuations in price Commodity
Standardized product usually produced in the primary sector (making use of natural resources) Government sets a fixed price Problems with Buffer Stock Schemes High cost of storage Underfunding of the schemes Need to predict future supply/demand shifts is difficult Trying to balance the surpluses & shortages that occur over the years Running out of stock when price are rising
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