Chapter_4 - Chapter 4 The Market Strikes Back What happens...

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Chapter 4: The Market Strikes Back What happens when the government intervenes in a perfectly competitive market?
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Introducing Chapter 4… Reviewing where we stand Assume a perfectly competitive market Price is stable at equilibrium, but… -Any given firm wants to increase price and consumer wants to lower it. -Ceteris paribus, the only way to change price is government intervention
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Government Intervention Three ways governments can intervene in markets: 1. Price controls (ceilings and floors) 2. Quantity controls 3. Taxes Three things to note for each intervention: 1. How it is modeled graphically 2. Impact on efficiency 3. Why it would be enacted
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Intervention 1: Price Ceiling What are they? A maximum amount sellers are allowed to charge for a good If binding, Q s < Q d Why are they enacted? Example: 1973 and 1974 OPEC oil embargo. Congress imposed price ceiling of $.57 a gallon. What happened?
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Price Ceilings: Economic Impact Main point: they’re inefficient. Inefficient allocation to consumers Wasted resources due to shortage Inefficiently low quality Encourage black markets
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Intervention 2: Price Floor What are they? A minimum amount sellers are allowed to charge for a good If binding, Q s > Q d Why are they enacted? Example: minimum wage
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Price Floors: Economic Impact They’re inefficient Inefficient allocation among sellers Wasted Resources Quality too high Illegal Activity
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Summary: price controls Price ceiling Price floor holds price up Benefits some firms Q s > Q d holds price down Benefits some consumers Q s < Q d
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Question 4.1 Suppose that to control rising healthcare costs the government sets the maximum price for a normal doctor's visit at $20, but the current market price is $40. Then:
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Chapter_4 - Chapter 4 The Market Strikes Back What happens...

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