notech6

notech6 - Chapter 6 - Government Policies This chapter...

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Chapter 6 - Government Policies This chapter provides an introduction to some economic policies implemented by the government including restrictions on the operation of markets, and taxes. Price Controls Governments over time, and across countries, often place restrictions on the operation of markets. Examples include forbidding certain products from being traded (e.g. illegal drugs). As a result, drugs, prostitution, and other illegal activities are conducted in what are known as “black markets”. Governments also intervene in markets by regulating prices. These are called price ceilings , or a maximum price. This is when the government requires that the price of a product be sold at a price not to exceed the ceiling price.
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It might be the case that the price ceiling is so high that it is not binding – for example, suppose the government forbid that the price of a can of coca cola cannot exceed $20. This price ceiling is far above the equilibrium price, and in this case the price ceiling is not-binding – it doesn’t have any impact on the market price or the equilibrium quantity. On the other hand, a price ceiling is binding if the ceiling is below the equilibrium price. When the government imposes a binding price ceiling, then there is a shortage – demand exceeds supply, because the price is below the equilibrium price. In this case, the produce price no longer allocates the distribution of the product, as it does in a free market. Instead, the allocation of the product is done some other way. With excess demand, the product must somehow be rationed.
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the product. This is inefficient, because it is a waste of consumers’ time. Alternatively, the government may provide “ration coupons” to consumers that allow the consumer to buy a certain amount of the product at a specified price. This happened during World War II, when the government controlled production and there were shortages of certain types of food, including dairy products. What might you expect to happen with rationing? Economics is about making trades. If goods are rationed with a long line, you would expect to pay people to stand in line for you. Or you would expect that consumers purchase the product from someone who already has waited in line and purchased it (much as ticket re-sellers do with tickets to concerts and sports events). With ration coupons, you would expect to see people purchasing ration
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This note was uploaded on 04/01/2008 for the course ECON 2 taught by Professor Hou during the Winter '07 term at UCLA.

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notech6 - Chapter 6 - Government Policies This chapter...

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