Week2_MarketIntervention

Week2_MarketIntervention - MARKET INTERVENTION AND...

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MARKET INTERVENTION AND GOVERNMENT POLICY
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GOVERNMENT INTERVENTION Free and competitive markets lead to efficient economic outcomes. Not everybody, however, is happy with this process. ( Sometimes, the sellers find the price too low. Other times, the buyers think it is too high. Governments also want to impose taxes.) Lobbying by market participants or ‘benevolent’ social action by governments lead to market intervention. ( It never makes sense from an macroeconomic point of view.) We’ll only cover the two main forms of market intervention: price controls and taxation.
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Figure 1 A Market with a Price Ceiling (a) A Price Ceiling That Is Not Binding Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Equilibrium quantity $4 Price ceiling Equilibrium price Demand Supply 3 100 The market clears at $3 and the price ceiling is ineffective.
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Figure 1 A Market with a Price Ceiling (b) A Price Ceiling That Is Binding Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Demand Supply 2 Price ceiling Shortage 75 Quantity supplied 125 Quantity demanded Equilibrium price $3
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Week2_MarketIntervention - MARKET INTERVENTION AND...

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