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Unformatted text preview: Kristin Chen Econ Ch 4—The Market Strikes Back 1. Why Governments Control Prices a. Strong political demand for gov’t to intervene b. P rice controls = when a government intervenes to regulate prices i. price ceiling = upper limit ii. price floor = lower limit 2. Price Ceilings a. Usually employed when sudden price increases can hurt many people but produce big gains for a few i. Ex: WWII, CA electricity b. Modeling a price ceiling i. Horizontal line on graph ii. Creates a shortage when imposed under equilibrium price c. Why does it cause inefficiency? i. Shortages inefficiency ii. Inefficient allocation to consumers = people who want the good badly and are willing to pay a high price don’t get it, and those who care relatively little about the good and are only willing to pay a low price do get it iii. Wasted resources = people spend money and expend effort in order to deal with the shortages caused by the price ceiling iv. Inefficiently low quality = sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price v. Black markets = market in which goods or services are bought and sold illegally d. 3 common results of price ceilings i. Persistent shortage of the good ii. Inefficiency 1. inefficient allocation 2. wasted resources 3. inefficient low quality iii. Black markets 3. Price Floors a. Minimum wage = legal floor on the wage rate, which is the market price of labor i. When its above the equilibrium rate, some ppl who are willing to “sell labor” can’t find buyers...
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This note was uploaded on 02/13/2008 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell.
- Fall '06