When We Don’t “Like” the Market Outcome The Effect of Price Floors, Price Ceilings Tariffs,...
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Transcript of When We Don’t “Like” the Market Outcome The Effect of Price Floors, Price Ceilings Tariffs,...
When We Don’t “Like” the Market Outcome
The Effect of Price Floors, Price CeilingsTariffs, Quotas, Subsidies and Externalities
on the Market Outcome
Solution to shortage problem:offer incentives to suppliers to increase supply
P*
Quantity0
Price
Demand
Supply
PriceCeiling
Q**Q*
Subsidy
Solution to shortage problem: Set price = equ. price and offer subsidies to buyers
P*
Quantity0
Price
Demand
Supply
PriceCeiling
Shortage
QdQs Q*
Example of price ceiling: Rent Control in the Short Run
Quantity ofApartments
0
Rental Price ofApartment
Demand
Supply
Controlled rent
Shortage
Supply and demand for
apartments are relatively inelastic
QdQs
Example of price ceiling: Rent Control in the Longer Run
Quantity ofApartments
0
Rental Price ofApartment
公寓租金价格
Demand
Supply
Controlled rent
Shortage
短缺
Supply and demand for apartments are more
elastic...
QdQs
How to solve the surplus problem?
P*
Quantity
0
Price
Demand
Supply
Price floor
QsQd
Surplus
Q*
1. Destroy it
2. Give it away or sell it in another market
3. Pay producers Pf * [ Qs(Pf) – Qd(Pf)] not to produce beyond Qd(Pf)
Pf
MinimumWage
Example of price floor: The Minimum Wage
Quantity ofLabor
0
Wage
Labor Demand
Labor supply
QuantitySupplied
QuantityDemanded
Labor surplus (unemployment)
Effect of Import Tariffs and Quotas: Domestic Price Increases
Quantity0
DomesticPrice
D
S
S’
Q1
P2
P1
Q2
QMARKET
Negative Externalities
Quantity0
Price
Market Demand (market value)
Market Supply (market cost)
Social Supply(social cost )
Qsociety
Psociety
Pmarket