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