Chapter 5: Price Controls and Quotas: Meddling with Markets

~ At the new fishing quota, what is the quota rent per pound of Bluefin tuna? ~ Suppose the average fisherman can catch 200,000 pounds of Bluefin tuna every year ( 100 tons). What is the value of a Bluefin tuna fishing license?

$ 1.35 = (11.35-10.00) $ 270,000

The graph shows the market for tutoring at a university. ~ If there is a price ceiling of $5, the difference in the price consumers have to pay and the price that they are willing to pay is, in numerals, $_____.

15

Suppose that the equilibrium price of gasoline is $4 per gallon. The government feels that this price is too high, and it imposes a price ceiling at $3. Which of the following is a way that the price ceiling causes inefficiency?

Since a price ceiling causes a shortage, consumers waste time waiting in line to get gasoline.

Which of the following is an example of a quota?

Taxicab medallions in New York City

The graph shows the market for tutoring at a university. ~ If a price ceiling is imposed at $15 per hour, which of the following is true?

The equilibrium outcome will prevail.

Which of the following prices would be a binding price floor for strawberries if the current equilibrium price is $3 per pound?

c) $4

Farmers in developing countries want the United States to reduce the subsidies that it gives to U.S. farmers because subsidized agricultural products from the United States:

lead to agricultural surpluses and lower prices for farmers in developing countries.

A binding price floor is likely to cause deadweight loss because:

the quantity of the good transacted is less than the equilibrium quantity transacted.

The market for apples is in equilibrium at a price of $0.50 per pound. If the government imposes a price ceiling in the market at $0.40 per pound:

there will be a shortage of the good.

~ Which is likely to occur as a result of the price ceiling? ~ The answer above is an example of

~ Landlords will begin decreasing the quality of one-bedroom apartments by not making repairs or paying for upkeep. ~ inefficiently low quality.

~ The price ceiling results in a ~ The city now has a shortage or surplus of how many apartments?

~ Shortage ~ 4500 apt.

The graph shows the market for tutoring at a university. ~ True or False: If a price ceiling is imposed at $7.50 per hour, there will be a surplus of 100 hours of tutoring. This is _____.

False

~ Which is likely to result from increasing the minimum wage? ~ This result of increasing the minimum wage is an example of a ____.

~ Some employers and workers will agree on a wage of less than $20/hour and not report the wages to the government. ~ black market.

If imposed, the minimum wage will result in a ____ of ____.

~ Surplus ~ 200 workers.

~ Are tenants better off as a result of these policies? ~ Are landlords better off as a result of these policies? ~ Is society better off as a result of these policies?

~ Uncertain ~ Yes ~ Yes

The graph shows the market for tutoring in economics at a university. ~ If a quota is established at 200 hours, the deadweight loss is:

$375

WORK IT OUT///////////////////////////////////// What effect will the elimination of the rent control have on the quantity and quality of rental housing supplied?

Eliminating the rent control will cause both quantity supplied and housing quality to increase.

True or False: A price floor is a minimum price buyers are required to pay for a good or service. This is _____.

True

Quantity controls may often:

lead to illegal activities.

If a quota is set above the equilibrium quantity, there will be:

no immediate effect.

The graph shows the market for bicycles. ~ Suppose a quota is established at 3 bicycles. The deadweight loss is:

$200.

The graph shows the market for tutoring in economics at a university. ~ If a quota is established at 200 hours, the quota rent is:

$7.50.

(Table: Market for Butter) Use Figure: Market for Butter. If the government imposes a price floor of $0.90 per pound of butter, the quantity of butter actually purchased will be _____ million pounds.

10.0

The graph shows the market for apartments in Gotham City. ~ If the maximum monthly rent is, in numerals, $_____, consumer surplus is area B + C.

1000

The graph shows the market for bicycles. ~ If a price ceiling is imposed at (in numerals) $_____, there is a shortage of 2 bicycles.

200

The graph shows the market for tutoring at a university. ~ If there is a price ceiling of $5, the producer surplus transferred to those students who are able to continue to get tutoring is, in numerals, $_____.

500

The graph shows the market for bicycles. ~ If a price floor is imposed at $300, the quantity supplied is _____ bicycles.

6

END OF CHAPTER////////////////////////////////// a.) Assume that there are no restrictions on the number of taxi rides that can be supplied (there is no medallion system). Find the equilibrium price and quantity. Equilibrium price: $ Equilibrium quantity:

6.50 11

Rent controls are a typical example of a price ceiling. ~ Please select all likely consequences of rent controls when the price ceiling is binding.

ALL: inefficient allocation of apartments reductions in apartment quality more subletting of apartments black markets

True or False: A quota imposed below the equilibrium quantity results in a supply price of a good that is greater than the demand price. This is _____.

False

True or False: A quota restricts the price at which a good can be transacted. This is _____.

False

True or False: If the university puts a binding price ceiling on used textbooks, producer surplus will decrease, but total surplus will increase. This is _____.

False

True or False: Legal restrictions on how high or how low a market price may go are known as trade barriers. This is _____.

False

True or False: Price ceilings cause a loss of efficiency because they increase the quantity purchased above the equilibrium quantity. This is _____.

False

~ Before the government imposes its regulations, what is the price of crab?$___/pound ~What is the demand price after the quota? $___/pound ~ What is the quota rent for Alaskan king crab? $___/pound

GRAPH: Quota Rent Deadweight Loss Quota $3.50 $4.00 $1.00

The graph of a labor market is shown. Place the endpoints of the minimum wage line to indicate a binding minimum wage in this market.

GRAPH: Top Row

~ Ivan, a Russian fishermen, needs a permit so that he can participate in commercial ice fishing for yellow perch and legally sell the perch he catches. ~ Garet is an undergraduate student who has to work at McDonald's part-time to help pay his tuition loans. Garet's wage _____. ~ D'Artagnan, a poor French noblemen, discovers a large cache of truffles in his backyard. The truffles price cap _____. ~ Athos is an avid collector of swords, but as they are illegal to purchase, he obtains them through illicit means. Buying swords illegally_____. ~ To help out farmers, the government sets the minimum price of potatoes at $26 per bushel. Minimum potato price_____. ~ In order to support domestic sales of textiles, the country of Germany puts a cap on the amount of foreign textiles it imports. Cap on imports_____.

License Price Floor Price Ceiling Black Market Price Floor Quota

What effect would an income supplement policy have on the market? What effect would it have on the market rent and quantity of rental housing supplied, compared with your answer to the first question?

The income supplement will cause demand to shift right, causing the equilibrium quantity and rental price to increase.

LEARNING CURVE///////////////////////////////// True or False: Although most price ceilings are removed fairly quickly, rent controls have existed for many years in New York City. This is _____.

True

The graph shows the market for bicycles. ~ True or False: If a price floor of $400 is established, inefficiency results because some sellers who are willing to sell 2 bicycles for $100 are not able to sell. This is _____.

True

Suppose that the equilibrium price of gasoline is $4 per gallon. If the government feels that this price is too high and imposes a price ceiling at $3, the result will be:

a shortage.

Ivan, a Russian fisherman, needs a permit to fish and sell a certain type of fish, the yellow perch.

license

Which example is a quantity control?

limits on the number of red snappers that can be caught in the Gulf of Mexico

~ Steve decides not to rent out his second home since he is not allowed to set the rate above $1000 per month even though he knows he could find renters willing to pay much more.

price ceiling

Suppose that the equilibrium price of gasoline is $4 per gallon. If the government feels that this price is too high, it could impose a(n):

price ceiling.

Garret is an undergraduate looking for a job to pay for college. As Garret seeks employment, he is glad to know that he will be paid at least $7.25 per hour.

price floor

Government intervention in the form of binding price floors or binding price ceilings will:

result in either surpluses or shortages.

(Figure: The Market for Economics Textbooks) Use Figure: The Market for Economics Textbooks. At a price ceiling of $40, the market outcome would be a _____ of _____ textbooks.

shortage; 30

The graph shows the market for tutoring at a university. ~ If there is a price floor of $20, the difference in the price producers receive and the price that they are willing to take is (in numerals) $_____.

15

The graph shows the market for tutoring at a university ~ If a price ceiling is imposed at $5 per hour, there will be a shortage of _____ hours of tutoring.

300

The graph shows the market for tutoring at a university. ~ If there is a price floor of $15, deadweight loss is, in numerals, $_____.

375

True or False: A temptation to engage in illegal activity, such as bribery, is a source of inefficiency for price floors. This is _____.

True

True or False: Airlines could not compete on price when transatlantic airfares were subject to price floors, and so they competed on the basis of in-flight meals. This is _____.

True

The graph shows the market for tutoring at a university. ~ If there is a price floor of $20, deadweight loss is, in numerals, $_____.

1500

The persistent unwanted surplus that results from a binding price floor causes inefficiencies that do NOT include:

inefficiently low quality.

The U.S. government limits the amount of sugar that can be purchased from foreign sugar producers.

quota

The graph shows the market for bicycles. ~ If there is a price ceiling of $150, inefficiency results because:

some consumers who are willing to pay more than the price ceiling are not likely to be able to purchase a bicycle.

In the New York taxi cab example in the text:

taxi medallions were described as a form of quantity control, or quota.

HOMEWORK//////////////////////////////////////// ~ What type of price control would policy makers use to keep the price of chicken from getting too high? ~ Suppose that the government does implement the appropriate price control you selected previously. Which of these prices would be binding?

~ a price ceiling ~ $5

The graph shows the market for tutoring at a university. ~ If there is a price floor of $15, the consumer surplus transferred to those students who are able to continue getting hired for tutoring is, in numerals, $_____.

1000

7.) b.) Suppose the government sets a target price of $5 per bushel for any quantity supplied up to 1,000 bushels. How many bushels of corn are purchased by consumers and at what price? By the government?How much does the program cost the government? How much revenue do corn farmers receive? ~ How many bushels of corn are purchased by consumers?____bushels ~ What price will consumers pay?$___. ~ How many bushels of corn are purchased by the government?___bushels ~ How much does the program cost the government?$__. ~ How much revenue do corn farmers receive?$___.

1000 $???? 0 $2000 $5000

7.) a.) If the government sets a price floor of $5 per bushel, how many bushels of corn are produced? How many are purchased by consumers? By the government? How much does the program cost the government? How much revenue do corn farmers receive? ~ How many bushels are produced?____bushels ~ How many bushels are purchased by consumers? ____bushels ~ How many bushels are purchased by the government?____bushels ~ How much does the program cost the government?$___. ~ How much revenue do corn farmers receive?$____.

1200 800 400 2000 6000

The graph shows the taxi market in Gotham City. ~ Suppose a quota is established at 10 million rides per year. The deadweight loss is, in numerals, $_____ million.

15

The graph shows the market for tutoring at a university. ~ If there is a price ceiling of $5, the resulting deadweight loss is, in numerals, $_____.

1500

The graph shows the market for tutoring in economics at a university. ~ If a quota is established at 100 hours, the deadweight loss is, in numerals, $_____.

1500

The graph shows the market for bicycles. ~ If a price ceiling is imposed at $100, the quantity supplied is _____ (how many) bicycles.

2

The graph shows the market for bicycles. ~ If there is a price ceiling of $150, deadweight loss is, in numerals, $_____.

200

The graph shows the market for tutoring at a university. ~ If there is a price ceiling of $7.50, consumer surplus is, in numerals, $_____.

2500

The graph shows the market for bicycles. ~ If a price floor is imposed at (in numerals) $_____, there is a surplus of 6 bicycles.

400

The graph shows the market for bicycles. ~ If there is a price ceiling of $100, deadweight loss is, in numerals, $_____.

450

b.) Suppose that the mayor sets a price ceiling at $5.50. How large is the shortage of rides? Illustrate by moving the line labeled Shortage to the appropriate position on the graph.

GRAPH: eq. set at 5.50

7.) c.) Which of these programs (in parts a and b) costs corn consumers more? Which program costs the government more? Explain. ~ Which program costs consumers more and why? ~ Which program costs the government more and why? d.) Is one of these policies less inefficient than the other? Explain.

c.) The price floor costs consumers more because they pay $5 per bushel compared to $3 under the target price policy. ~ Both programs cost the government the same amount because one program's higher cost to the government per bushel is offset by a lower quality. d.) The target price policy is less inefficient because it avoids creating an incentive to waste scarce resources producing unwanted corn.

QUIZ Q's/////////////////////////////////////////// (Figure: Rent Controls) Use Figure: Rent Controls. If rent controls are set at Rent0: ~

some renters will be willing to pay a price as high as Rent4 for Q0 units.

The United States and the European Union impose price floors on many agricultural products. These price floors lead to unwanted surpluses. To deal with a surplus:

the U.S. government in some cases has destroyed the surplus production.

~ If Iceland's governor chooses to set a price floor of 15 rigsdaler for an oil lamp, what will occur? ~ If Iceland's governor chooses to set a price ceiling of 40 rigsdaler for an oil lamp, what will occur?

~ Nothing will change. ~ Nothing will change.

(Table: The Market for Taxi Rides) Use Table: The Market for Taxi Rides. If a government quota limit at 9 million rides is imposed, the quota rent that will accrue to the owner of a taxi medallion will be _____ per ride, but there will be a total missed opportunity (inefficiency) to consumers and producers of _____ million rides.

$1 ; 1

(Figure: The Shrimp Market) Use Figure: The Shrimp Market. If the government imposes a quota limiting sales of shrimp to 250 pounds, the quota rent per pound is:

$10

The graph shows the market for tutoring in economics at a university. ~ If a quota is established at 200 hours, the demand price is:

$15.

If Yemen enacts a minimum wage of $8.50 per hour, the labor market will experience

a surplus of 7,000 workers.

True or False: A quota is another name for a quantity control. This is _____.

True

4.) b.) How much surplus milk will be produced as a result of this policy? million pints per year c.) What will be the cost to the government of this policy?$___million d.) Since milk is an important source of protein and calcium, the government decides to provide the surplus milk it purchases to elementary schools at a price of only $0.60 per pint.

b.) c.) d.)

Suppose that the average cost of a doctor visit is $100. If the government imposes a price ceiling of $50 on the cost of a doctor visit, there will be:

an excess demand for doctor visits.

PRE-CLASS TUTORIAL/////////////////////////////// If the equilibrium price of solar panels is $200 per panel, but a price ceiling of $150 per panel is imposed, what happens to the market for solar panels?

b) quantity demanded exceeds quantity supplied and a shortage occurs

b.) What is the demand price at which consumers wish to purchase 80,000 pounds of lobsters? $____per pound c.) What is the supply price at which suppliers are willing to supply 80,000 pounds of lobsters?$____per pound d.) What is the quota rent per pound of lobster when 80,000 pounds are sold?$___. e.) Identify a transaction that benefits both buyers and sellers but is prevented by the quota restriction.

b.) $ 14 c.) $8 d.) $6 e.) 4Trade 80,001 pounds of lobsters at a price between $8 and $14

A binding rent-control price ceiling does NOT result in:

inefficiently high quality of the good being sold.

A price ceiling will have NO immediate effect if:

it is set above the equilibrium price.

Quota rent is:

the earnings that accrue to the license-holder from ownership of a valuable commodity, the license.

(Table: Quantity Supplied and Quantity Demanded) Use Table: Quantity Supplied and Quantity Demanded. If a price ceiling of $10 is imposed in this market:

the quantity demanded will be greater than the quantity supplied.

d.) Suppose that the stock market rises and the demand for taxi rides returns to normal (that is, returns to the demand schedule given in the table). What is the resulting price, quantity transacted, and quota rent? ~ Price: $ ~ Quantity:___million rides per year ~ Quota rent: $___per ride

~ ~ ~

a.) In the absence of government restrictions, what are the equilibrium price and quantity? ~ The equilibrium price is $___. ~ The equilibrium quantity is___thousand pounds of lobsters.

~ 10 ~ 120

c.) Suppose that the stock market crashes, and, as a result, people in Gotham City are poorer. This reduces the quantity of taxi rides demanded by 6 million rides per year at any given price. Illustrate this change in the market below, paying special attention to the scale on the quantity axis. ~ What effect will the mayor's new policy have now?

~ GRAPH: ~ It will have no effect.