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Unformatted text preview: CHAPTER 4. THE MARKET STRIKES BACK PRICE CONTROLS Price Ceiling : Highest price at which a good or service can be sold. Price Floor : Lowest price at which a good or service can be purchased. Price Ceiling Price Supply Ceiling Shortage Demand Quantity Qs Qd The graph shows a ceiling price. In this case the maximum price allowed is lower than the price toward which the market converges. At the ceiling the quantity demanded Qd is greater than the quantity supplied Qs, so there is a shortage . Because of the ceiling, the shortage creates mechanisms (other than price adjustment) to allocate the scarce goods and services whose prices are kept artificially low. Lines of people waiting to buy the good may be one of these mechanisms. Other mechanisms can be bribes or personal influence on those who have access to the good. It can be seen that the government intervention can lead to inefficiencies in the market (time wasted in lines or money wasted in bribes) that could have been avoided by letting the...
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- Spring '08