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

Price Ceilings

P*

Quantity 0

Price

Demand

Supply

PriceCeiling

Shortage

QdQs Q*

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

Price Floors

P*

Quantity

0

Price

Demand

Supply

Price floor

QsQd

Surplus

Q*

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

Effect of Domestic Subsidies: World Price Declines

Quantity0

WorldPrice

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

Positive Externalities

Quantity 0

Price

Market Demand (market value )

Market Supply (market cost)

Social demand (social value)

Psociety

Pmarket

QMARKET Qsociety