When We Don’t “Like” the Market Outcome The Effect of Price Floors, Price Ceilings Tariffs, Quotas, Subsidies and Externalities on the Market Outcome.

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When We Don’t “Like” the Market Outcome The Effect of Price Floors, Price Ceilings Tariffs, Quotas, Subsidies and Externalities on the Market Outcome

Price Ceilings P* Quantity 0 Price Demand Supply Price Ceiling Shortage QdQs Q*

Solution to shortage problem: offer incentives to suppliers to increase supply P* Quantity 0 Price Demand Supply Price Ceiling Q** Q*

Subsidy Solution to shortage problem: Set price = equ. price and offer subsidies to buyers P* Quantity 0 Price Demand Supply Price Ceiling Shortage QdQs Q*

Example of price ceiling: Rent Control in the Short Run Quantity of Apartments 0 Rental Price of Apartment 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 of Apartments 0 Rental Price of Apartment 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* Quantit y 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

Minimum Wage Example of price floor: The Minimum Wage Quantity of Labor 0 Wage Labor Demand Labor supply Quantity Supplied Quantity Demanded Labor surplus (unemployment)

Effect of Import Tariffs and Quotas: Domestic Price Increases Quantity 0 Domestic Price D S S’ Q1 P2 P1 Q2

Effect of Domestic Subsidies: World Price Declines Quantity 0 World Price D S S’ Q1 P2 P1 Q2

Q MARKET Negative Externalities Quantity 0 Price Market Demand (market value ) Market Supply (market cost) Social Supply (social cost ) Q society P society P market

Positive Externalities Quantity 0 Price Market Demand (market value ) Market Supply (market cost) Social demand ( social value ) P society P market Q MARKET Q society

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