please answer the 7 folllowing questions , please mark the answer for each quest
ID: 1189951 • Letter: P
Question
please answer the 7 folllowing questions , please mark the answer for each question , thanks
Markets do not introduce regulations GOVERNMENTS do. They do this when they believe the equilbrium price set by the markets is not efficient. Governments intervene in markets by setting price controls. Examples of price controls are price ceiling and price floor. If the government wants to prevent the price from falling to the equilibrium price set by the forces of supply and demand, then the government introduces a price floor. If the government wants to prevent the price from rising to the equilibrium price, then it introduces a price ceiling. A price floor set below the equilbrium price is not effective. In other words there is no point to setting a price floor below the equilibrium price because any price below the equilibrium will result in a shortage and thus automatically increase the price back to the equilibrium price. Similarly there is no point to introducing a price ceiling above the equilibrium price because, if the price exceeds the equilibrium, the surplus will automatically pull back the price to the equilbrium price. Thus a price ceiling introduced above the equilibrium price is not effective either. In both cases equilibrium price will prevail. In the absence of imperfections such as taxes and transaction costs markets (forces of supply and demand) allocate resources to their best uses and produce the most efficient price output combination for the society. However, in real life many imperfections exist and governments intervene. Having said this much, now I want you to explain the following supporting your answers with examples. Effective Price floor (above the equilibrium price) and efficiency. Illustrate by giving examples, no two examples given in class should be the same. Effective Price ceiling (below the equilibrium price) and efficiency. Illustrate by giving examples, no two examples given in class should be the same Non-binding price floor. Illustrate by giving examples, no two examples given in class should be the same Non-binding price ceiling. Illustrate by giving examples, no two examples given in class should be the same In perfectly competitive markets, what is the most efficient rationing mechanism? Why? How do taxes on sellers affect market outcomes? How do taxes on buyers affect market outcomes?Explanation / Answer
1. Effective price floor is above equilibrium level and would lead to inefficiency & decreased total economic surplus. This is because even though producer surplus would increase, but a reduced demand due to high prices would decrese the overall sales. This would result into net decrease total economic surplus or deadweight loss.
Examples
(i) High minimum wage - It may lead to higher wages for some but would decrease overall demand for labour
(ii) Minimum procurement prices for foodgrains - May increase surplus for some farmers but would decrease overall demand and lead to surplus stocks.
2. Effective price ceiling is below equilibrium level and would lead to inefficiency & decreased total economic surplus. This is because even though consumer surplus would increase, but a reduced supply due to low producer surplus and high demand would decrease the overall sales. It may also give rise to black market. This would result into net decrease total economic surplus or deadweight loss.
Examples are price control on essential drugs and food items.
3. Non-binding price floors are the ones that are below the equilibrium price and as it is do not have any impact on market efficiency since markets continue to be dictated by demand and supply forces.
Examples -
(i) Market determined wage - $10, Minimum wage rate - $8
In this case any attempt to decrease the wages by producers would be met by decrease supply which would lead the wage back to equilibrium rate.
(ii) Equilibrium rate of wheat - $5, Price floor - $3
4. Non-binding price ceilings are the ones that are above the equilibrium price and as it is do not have any impact on market efficiency since markets continue to be dictated by demand and supply forces.
Examples -
(i) Market determined drug rate for X - $10, Price Ceiling - $12
In this case any attempt to increase the price by producers would be met by decrease in demand which would lead the price back to equilibrium rate.
(ii) Equilibrium rate of wheat - $5, Price ceiling - $6
5. In perfectly competitive markets price is the most efficient rationing mechanism because it acts as rationing device to equate demand and supply. If demand outstrips supply or supply falls below demand, price would rise till they both are matched again at the new equilibrium levels. There is no outside interference and it is the pure interplay of supply and demand forces.
6. Taxes on sellers would increase their costs and would lead to a leftward or shift of supply curve making the goods expensive. This is because either the supplier would absorb the cost & thus reducing their surplus or they would pass it to consumers and hence, increasing the price. In both the cases, the sales of the product would fall down.
7. Taxes on buyers would reduce their disposable income( in case of direct taxes) or make the product expensive for them( in case of indirect taxes). This would lead to fall in demand in the market
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