Embedded Files
--THINK AHEAD--
--THINK AHEAD--
"Imagine the government suddenly said that your school could only charge half the current tuition fees."
--INTRODUCTION--
--DEFINITION--
--DEFINITION--
A government may in some situations set a legal MAXIMUM PRICE for a particular good; this is called a PRICE CEILING. It means that THE PRICE THAT CAN BE LEGALLY CHARGED TO THE CUSTOMERS for the good MUST NOT BE HIGHER THAN THE LEGAL MAXIMUM PRICE.
--THINK AHEAD--
--THINK AHEAD--
"Why would the government put a price ceiling on water and bread but not on essential student items like 'Five Guys' and 'Monster energy drinks'?"
--RATIONALE--
--RATIONALE--
A 'PRICE CEILING' is primarily SET IN ORDER TO PROTECT THE CONSUMER, as the government may decide that the MARKET PRICE IS SET TOO HIGH given the importance of the good, ESPECIALLY FOR LOW-INCOME EARNERS WHO CAN'T AFFORD MORE EXPENSIVE ALTERNATIVES.
As such price ceilings are USUALLY PUT ON STAPLE FOODS, such as bread, milk, rice, and sometimes low-cost housing, which could all be described as 'NECESSITIES' for LOW-INCOME EARNERS WHO CAN'T AFFORD MORE EXPENSIVE ALTERNATIVES.
--CONSEQUENCES--
--THINK AHEAD--
--THINK AHEAD--
"If the government sets the maximum price above equilibrium, what will happen to the quantity demanded and the quantity supplied?"
--SHORTAGES--
--SHORTAGES--
What is the IMPACT of a PRICE CEILING on market PRICE, QUANTITY SUPPLIED, QUANTITY DEMANDED, and PRODUCER REVENUE?
--NON-PRICE RATIONING--
--NON-PRICE RATIONING--
."If we only have a limited amount of the product and we can't use price to 'ration' to the highest bidder, how do we decide who eventually gets them?"
NON-PRICE RATIONING: As we have seen, the implementation of a price ceiling results in a SHORTAGE. Given that the price mechanism can no longer achieve its rationing function, this raises the question, HOW WILL THE INSUFFICIENT QUANTITY SUPPLIED BE DISTRIBUTED? This can now only be achieved through NON-PRICE RATIONING METHODS, including:
FIRST-COME-FIRST-SERVED
QUALIFICATION CRITERIA
TRADITION
FAVOURITISM
ETC...
--THINK AHEAD--
--THINK AHEAD--
"Is it possible for you to purchase a child's MRT card and use it in HK without anyone knowing?", "what about a cinema ticket?", "Is there anyway to stop people with higher incomes taking advantage of 'educators/student' prices?"
--UNCERTAIN OUTCOMES--
--UNCERTAIN OUTCOMES--
."Will we be able to make sure only low-income earners are the ones who can get access to the low-priced goods?"
Without some form of enforced qualifying criteria (e.g., must have income less than $10k) NON-PRICE RATIONING METHODS may NOT GUARANTEE THAT LOW-INCOME EARNERS WILL GET THE GOOD AHEAD OF HIGH-INCOME EARNERS.
For example, a high-income earner could still be ahead of a low-income earner if the distribution is based on a queuing system (first-come-first-served)
--BLACK MARKETS--
--BLACK MARKETS--
Clearly, with any shortage, there will ALWAYS BE BUYERS WILLING TO PAY MORE and SELLERS EQUALLY WILLING TO ACCEPT MORE, hence this encourages ILLEGAL UNDERGROUND (or PARALLEL) MARKETS to appear.
Of course, these illegal activities need POLICING which cost the government valuable resources (Opportunity cost)
--INEFFICIENCY--
--INEFFICIENCY--
Referring back to our work on MARKET EFFICIENCY in unit 2.3, we know that any quantity above or below the free-market equilibrium is considered inefficient, and in the case of a price ceiling there will be an UNDERALLOCATION OF RESOURCES & ALLOCATIVE INEFFICIENCY, since a lower-than-equilibrium price results in a smaller quantity supplied than the amount determined at the free market equilibrium, there are too few resources allocated to the production of the good, resulting in underproduction relative to the social optimum (or ‘best’). Society is worse off due to underallocation of resources and allocative Inefficiency.
NEGATIVE WELFARE EFFECTS:
--STAKEHOLDER IMPACT--
--STAKEHOLDER IMPACT--
🌏REAL WORLD EXAMPLES🌏
🌏REAL WORLD EXAMPLES🌏
RENT CONTROLS
FOOD CONTROLS
SWAB TEST CAP
--HIGHER LEVEL ONLY--
--CALCULATING EFFECTS OF PRICE CEILINGS--
--CALCULATING EFFECTS OF PRICE CEILINGS--
--INTERACTIVE PRACTICE--
--TASK TIME! (IA PRACTICE)--
--TASK TIME! (IA PRACTICE)--
FIND A REAL WORLD EXAMPLE OF A PRICE CEILING, AND THEN WRITE A 800+ WORD ANSWER TO THIS QUESTION:
EXPLAIN THE MARKET, ECONOMIC, AND STAKEHOLDER IMPACTS OF THIS TYPE OF GOV'T INTERVENTION.
ANSWER MUST INCLUDE:
1. DEFINITION
2. RATIONALE
3. MARKET & WELFARE DIAGRAMS
(Hand-drawn and uploaded)
NOTE: YOU WILL HAVE 2 DAYS TO COMPLETE THIS AND IT MUST BE SUBMITTED THROUGH TURNITIN.
ESSAY PLAN
...A price ceiling refers to a form of government intervention which involves…
...It is usually imposed for the following reasons…
...In the case of the price ceiling imposed on rental accommodation in Mumbai, it has had the following impact on the market….
...In Fig 1. We can see that the price has fallen from…..shortage….
...In terms of the economic outcomes that will likely occur…. black market, poor quality..., low-income earners will not all receive the housing because the rationing system is based on first come first served, favouritism etc…
...As for the winners and losers in terms of welfare, we can see in fig 2…
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