price controls sfls
TRANSCRIPT
{Government intervention in the markets
Price Controls
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Saint Thomas Aquinas, (1225 – 7 March 1274)
Thomas is held in the Catholic Church to be the model teacher for those studying for the priesthood, and indeed the highest expression of both natural reason 自然的逻辑 and speculative theology 投机神学 .
So, he and others asked this question…
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What is an ethical price?合乎道德的
Hurricane 飓风2012 Hurricane Sandy
New York, modern day example
Lots of homes are destroyed and services and gas supplies have been cut and there is not enough for the people.
The governor of New York has a job to help people
Gave away free gasoline to help people 免费汽油
is that ethical?合乎道德的
The governor of New Jersey has a job to help people
People only pay a little more, and gas rationing 汽油配给
is that ethical?合乎道德的
Outcome of these policies is long lines for gas with many people going without it.
And those that got their first…
Hoarding囤积居奇
Price gouging价格欺诈
This led to the emergency services couldn’t get the supply they needed
Free and rationed gas didn’t lead to MORE gas (the real problem) and those that really needed it didn’t get it.
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What is an ethical price?合乎道德的What seems ethical might not be. What do you see? What do you not see?
If you control the price, do you make things better or worse?
The Cobra Effect 眼镜蛇Sometimes actions lead to unintended consequences called this.
Free toll roads during 国庆节
Better or worse?
{Government intervention in the markets
Price Controls
An Example Question:
Price Controls
You are the mayor 市长 of a major city like Shanghai. The price of apartments in your city is extremely high and many people cannot afford it. You want to help the people out and make housing more affordable for the people. What do you do?
One thing you can do is lower the price allowed for people to sell their apartments so more people can afford the lower price. However this may have unforeseen consequences.
Another Example Question:
Price ControlsYou are a the mayor 市长 in Shanghai.
Your city has many workers that work in factories that make a very poor wage that is not enough for them to live a decent life. Food prices are high, housing prices are high and the wage they get is barely enough to eat and survive, how can you help these people?
Perhaps you can institute a minimum wage that makes it so they have to be paid at least a certain wage so they may have more money and have a better life. But this also may have other consequences.
- Producing under the market EQ (not enough)
- Producing over the market EQ(too much)
Underproduction
Overproduction
Some Vocabulary first…
- is the maximum price sellers are allowed to charge for a good or service.
Leads to:
Price Ceiling
- is the minimum price buyers are required to pay for a good or service.
Leads to:
Price Floor
Binding - Such as this: 具有约束力的合同
Some Vocabulary first…
- A payment by a government to a producer to cover part of their costs.
Quota - An upper limit on the quantity of some good that can be bought or sold.
Subsidy
Price support
- Price floor for agricultural goods where the government guarantees to buy any surplus at that price.
Price support and Price floor are the same thing
Some Vocabulary first…
Deadweight loss(DWL)
- Deadweight loss is the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity
(What is lost during market inefficiencies)
P
QD
S
250 400
shortage
Price ceiling500
800
Price Ceiling- is the maximum
price sellers are allowed to charge
- also causes underproduction
Price Controls
Housing Market Example:
P
QD
S
250 400
Price ceiling500
More people want houses and can afford them.
But at the lower price there is not enough supply.
Now there will be less houses for people.
Price Controls
P
QD
S
150 500
shortage
Price ceiling500
800-- over time supply and demand become more elastic and shortages become bigger.
Price ControlsPrice Ceiling
P
Q
S
D250 400
Price ceiling500
800
- causes EQ to fall, total surplus to fall.
- causes a deadweight loss (DWL)and not enough supply to satisfy demand.
Deadweight loss
Price ControlsPrice Ceiling
Problems caused by Price Ceilings:- Inefficiently low quantity
low prices don’t give the incentive to increase quality.- Deadweight losses (DWL)
Loss of efficiency in the market.- Inefficient Allocation to customers
Shortages are caused in the market.- Wasted resources
Similar to the inefficient allocation.- Black markets
Do I really have to explain black markets?
Price Ceiling
Price Floor
- is the minimum price buyers are required to pay
- also causes overproduction
P
QD
S
400 550
Price floor5
surplus
Price Controls
Another Example Question:
Minimum Wage Example
A minimum wage is the most commonly used example in any textbook that shows the potential damages of a minimum wage.It’s a good one to show this
problem, but I think not the best because the evidence is weak and other markets would show this better, and you have to switch from thinking as a consumer of things to being a supplier of things that is sometimes confusing at first, but I digress…
Here Firms are Sellers
Here Firms are Buyers
Here households are buyers
Here households are sellers
W
LD
S
400 550
Price floor5
Notice first this is the market for labor, not goods like others so W and L
Supply of workers is higher, but business are demanding less workers because they have to pay more.
In total it is inefficient and there are less jobs so now poor people may be poorer and lose jobs.
Price ControlsMinimum Wage Example:
P
QD
S
250 400
Price floor1200
800
- causes EQ to fall, total surplus to fall.
- causes a deadweight loss(DWL) and overproduction with fewer buyers.
Deadweight loss
Price ControlsPrice Floor
Problems caused by Price Floors:- Inefficiently high quantity
waste of resources, above what consumers will accept.- Deadweight losses (DWL)
Loss of efficiency in the market.- Inefficient Allocation sales among sellers
Surpluses are caused in the market.- Wasted resources
Similar to the inefficient allocation.- Black markets
Again?
Price Floor
{
In combination with other policies things can become even worse:Even if those policies are meant to fix the price control problems.
P
QD
S
250 400
shortage
Price ceiling500
800
S + Subsidy
Price ControlsPrice Ceiling- is the maximum
price sellers are allowed to charge
- also causes underproduction
What if you added a subsidy to increase Supply to compensate?
My Chinese Chicken example of a price ceiling and a subsidy.
A true story that is too hard to fully explain here but had another cobra effect.
Controlling prices is inefficient and leads to losses.
But what about controlling quantity?
Price Controls
Quantity Controls
Better or worse?
Better or worse?
An example of controlling quantity (quotas)
P
QD
S
250
Quota
800
Quota- causes EQ to fall, total surplus to fall.
- and underproduction and not enough buyers are allowed to participate.
Quantity Controls
P
QD
S
250
Quota
800 Deadweight loss
Quota- causes EQ to fall, total surplus to fall.
- and underproduction and not enough buyers are allowed to participate.
Quantity Controls
P
QD
S
250
Quota
800
- causes total surplus to fall. - producers wouldn’t make this much anyway and it would not be binding.
- and overproduction at too high of a price for anyone to buy it.
Quota
Quantity Controls
P
QD
S
250
Quota
800
- causes EQ to fall, total surplus to fall.
- causes a deadweight loss (DWL) And overproduction at too high of a price for anyone to buy it.
Deadweight loss
Quota
Quantity Controls
So to summarize…
P
Q
S
D250 400
Price ceiling500
800
- causes EQ to fall, total surplus to fall.
- causes a deadweight loss (DWL)and not enough supply to satisfy demand.
Deadweight loss
Price ControlsPrice Ceiling
P
QD
S
250 400
Price floor1200
800
- causes EQ to fall, total surplus to fall.
- causes a deadweight loss(DWL) and overproduction with fewer buyers.
Deadweight loss
Price ControlsPrice Floor
- A price ceiling pushes the price of a good down.
- A price floor pushes the price of a good up.
- Both floors and ceilings reduce the quantity bought and sold.
- If sellers don’t want to sell as much as buyers want to buy, it’s the sellers who determine the actual quantity sold, because buyers can’t force unwilling sellers to sell and vice versa.
Price Controls
P
QD
S
250
Quota
800 Deadweight loss
Price ControlsQuota
- causes EQ to fall, total surplus to fall.
- and underproduction and not enough buyers are allowed to participate.
Quantity Controls
- A quantity control, or quota, drives a wedge between the demand price and the supply price of a good; that is, the price paid by buyers ends up being higher than that received by sellers.
- It is almost impossible to know what the “correct” quantity of a good or service should be
Quantity Controls
The Cobra Effect 眼镜蛇The EndThank you