Government Intervention with Markets

Government Intervention with Markets - shortage of goods...

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Government Intervention with Markets Theoretically, if left alone, a market will naturally settle into equilibrium: the equilibrium price ensures that all sellers who are willing to sell at that price, and all buyers who are willing to buy at that price will get what they want. At equilibrium, supply is exactly equal to demand. However, in some cases, the government will interfere with the market, putting in price ceilings or price floors, charging taxes, or using other measures to reshape the economy. Price Ceilings A price ceiling is an upper limit for the price of a good: once a price ceiling has been put in, sellers cannot charge more than that. In most cases, price ceilings are below market price. If a price ceiling is set at or above market price, there will be no noticeable effect, and the ceiling is only a preventative measure. If the ceiling is set below market price, however, there will be a
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Unformatted text preview: shortage of goods. For instance, if the government thinks 1) that people need bread to live, and 2) that the market price of bread is too high, then they might install a price ceiling. Assume that the following graph represents the market for bread. At equilibrium, the price will be p*, and the quantity will be q*. Figure %: Price Ceiling If the government puts in a price ceiling, we can see that the quantity demanded will exceed the quantity supplied, meaning that not enough bread will be supplied to satisfy demand. Such a situation is called a shortage. Because price ceilings are installed in the interests of the buyers, the government has to decide which situation is preferable for the buyers: not being able to afford any bread, or not having enough bread to go around....
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