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NDSU ECON 202 - Price Controls Cont.

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Econ 202 1st Edition Lecture 9Outline of Last Lecture I. The meaning of price controls and quantity controls, two kinds of government interventions in marketsII. How price and quantity controls create problems and can make a market inefficientIII. Why the predictable side effects of intervention in markets often lead economists to be skeptical of its usefulnessIV. Who benefits and who loses from market interventions, and why they are used despite their well-known problemsOutline of Current Lecture I. Inefficient Allocation to CustomersII. Wasted resourcesIII. Inefficiently Low QualityIV. Price ceilingV. Price floorsVI. Inefficiently High QualityVII. Controlling quantitiesCurrent LectureI. Inefficient Allocation to Customersa. Price controls distort signals that would help the goods get allocated their highest-valueduses. b. Consumers who value a good most don’t necessarily get it. So producers have no incentive to supply the good to the “right” people first.i. As a result, goods are misallocated.II. Wasted Resourcesa. Price controls that create shortages lead to bribery and wasteful lines.b. Shortages: not all buyers will be able to purchase the good.c. Normally, buyers would compete with each other by offering a higher price.d. If price is not allowed to rise, buyers must compete in other ways (waiting in line, illegal bribes and favors).III. Inefficiently Low Qualitya. At the controlled price, sellers have more customers than goods.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.b. In a free market, this would be an opportunity to profit by raising prices.i. But when prices are controlled, sellers cannot.ii. Sellers respond to this problem in two ways:1. Reduce quality2. Reduce service*** A black market is a market in which goods or services are bought and sold illegally—either because they are prohibited or because the equilibrium price is illegal.IV. Price Ceilingsa. They do benefit some people (who are typically better organized and more vocal than those who are harmed by them).b. If the price ceiling is longstanding, buyers may not have a realistic idea of what would happen without it.V. Price Floorsa. inefficiently low quantityb. Inefficient allocation of sales among sellersc. Wasted resourcesd. Inefficiently high qualitye. Temptation to break the law by selling below the legal priceVI. Inefficiently High Qualitya. Higher quality raises costs and reduces sellers’ profit.b. Buyers get higher quality but would prefer a lower price.c. Price floors encourage sellers to waste resources: i. higher quality than buyers are willing to pay forVII. Controlling Quantitiesa. Governments sometimes control quantity instead of price.Quota: an upper limit, set by the government, on the quantity of some good that can be bought or sold; also referred to as a quantity control.Quota limit: the total amount of a good under a quota or quantity control that can be legally transacted.License: the right, conferred by the government, to supply a good.Demand price: the price of a given quantity at which consumers will demand that quantity.Supply price: the price of a given quantity at which producers will supply that quantity.The Wedge, or Quota, rent: the difference between the demand price and the supply price at the quota limit. Equal to the market price of the license when the license is


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