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Price floors and ceilings

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Price floors and ceilings

  1. 1. Bellringer 1. Is equilibrium price always fair? 2. Think of an example when it might not be.
  2. 2. Dead weight loss • Misallocation of market resources • In other words: inefficiency • Causes: 1. market interferences (taxes, regulation) 2. Incomplete information 3. Monopolies 4. External supply issues (IE: pollution)
  3. 3. Functioning market at Equilibrium
  4. 4. Problem with Market, price now at higher place B & C “DWL” • QS! • Q1 to Q2
  5. 5. With partners Say the government, to help large families, made it illegal for the price to be higher than $0.10 per roll. 1.What would happen to the amount of toilet paper people would want to buy? 2.What would happen to the amount of toilet paper producers would want to sell? 3.What would happen to the number of sheets per roll? 4.What would happen to the texture of the toilet paper? 5.What other markets might be effected? (paper products?) 6.Who would get first chance at buying the toilet paper? 7.What would happen to the level of corruption in the country?
  6. 6. Surely no country would try this….
  7. 7. Price floorsPrice floors – low– low limit on how lowlimit on how low a price can goa price can go Price CeilingPrice Ceiling –– limit on howlimit on how high a price canhigh a price can gogo Government Solutions!
  8. 8. Price CeilingPrice Ceiling Designed to helpDesigned to help consumersconsumers Illegal to chargeIllegal to charge higher than the pricehigher than the price VenezuelaVenezuela Example: RentExample: Rent ControlsControls Problems?Problems? QualityQuality ShortagesShortages
  9. 9. Price CeilingPrice Ceiling Designed to helpDesigned to help consumersconsumers Illegal to charge higherIllegal to charge higher than the pricethan the price Example: RentExample: Rent ControlsControls Problems?Problems? QualityQuality ShortagesShortages Stossel ClipStossel Clip
  10. 10. Price FloorsPrice Floors Designed to help firmsDesigned to help firms Illegal to charge lower thanIllegal to charge lower than the pricethe price Example: Farmers during NewExample: Farmers during New DealDeal Problems?Problems? EfficiencyEfficiency SurplusesSurpluses
  11. 11. Price FloorsPrice Floors Designed to help firmsDesigned to help firms Illegal to charge lowerIllegal to charge lower than the pricethan the price Example: FarmersExample: Farmers during New Dealduring New Deal Problems?Problems? EfficiencyEfficiency SurplusesSurpluses
  12. 12. Homework • Complete the Price Floor/Ceiling worksheet • Read British price floor example: 1.Draw a correctly labelled graph of what is happening. 2.Is this a good idea? 3.Is the DWL worth it in your opinion? 4.Would you vote for this price floor in the USA?

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