Chapter 4 notes - Chapter 4: The market Strikes Back Why...

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Chapter 4: The market Strikes Back Why governments control prices There is often strong political pressure for governments to intervene in markets. Price controls are when a government intervenes to regulate prices. They normally take the form of an upper limit (the price ceiling) or a lower limit (the price floor) Price Ceilings Rent control is the most prevalent form of price ceiling Typically imposed during crisis Modeling a price ceiling Price ceilings have the effect of reducing the available supply since if a manufacturer is unable to sell a good at his desired price…he may produce less of that good, while demand will increase, creating a shortage Note: if a price ceiling is set above the equilibrium cost it will have no effect Why a price ceiling causes inefficiency An inefficient economy is one in which there are missed opportunites…price ceilings encourage these shortages Inefficient Allocation to Consumers Wasted Resources Price ceilings lead to wasted resources
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This note was uploaded on 09/20/2007 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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Chapter 4 notes - Chapter 4: The market Strikes Back Why...

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