2C Resource allocation: application of price theory
price ceiling
costs
price floor
benefits
definition: maximum legal market price set and allowed by the govt
affordability and fairness
as an anti-inflationary policy
Economic welfare
(Total surplus) will fall
Fall in revenue earned by the producers
Perpetual shortage in the market leading to inefficient allocation of resources (Allocative inefficiency)
May cause fall in incentive to invest in quality control and innovation.
The benefit of the lower price will also by offset by lower quality and variety.
Lower availability of goods and services may also decrease over time as new production is discouraged and the resources will be allocated to the production of the substitutes.
it does not necessarily lead to a fair distribution of resources
The shortage will then lead to a queue developing or adopting waiting lists.
Those people who need it the most may not be the first in line.
Rationing through the issue of coupons to allocate to those need it the most can also be administrative expensive.
Emergence of black markets (Only for goods that are considered necessity)
benefits
reasons
definition: minimum legal market price set and allowed by the govt
costs
To protect producers’ incomes. If the industry is subjected to price fluctuations, minimum prices would prevent producers’ income from falling during periods of low demand relative to supply.
In a labour market, minimum wage legislation can be used to prevent wage rate from falling below a certain level, ensuring an acceptable level of living standard.
To prevent some people from consuming the product. E.g.Minor smoking
producer
government
producers
If government buys up the surplus, then producers will enjoy can increase in revenue (not taken down)
May cause a fall in revenue if government did not buy all the surplus
the government will need to buy up all the surplus, an increase in government expenditure
consumer
Consumer surplus will definitely fall given that there is an increase in price paid by consumers
Producersurpluswill increase (assuming that the government buys up the surplus)
alternatives (raise the price of the goods)
decrease the supply of the good by setting a quota (controlling the quantity instead) of the good so that there will be lower consumption and a higher price
increase the demand for the good by promoting the use of it via advertisement
Tax
Quota
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Subsidies
Types
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Direct Taxes (Shift demand curve)
Indirect Taxes (Shift supply curve)
Taxes on income and wealth. Consumers paid directly to the authorities e.g. income tax, capital gain tax
Taxes on expenditure . Paid by consumers through suppliers (indirectly) e.g. GST, petrol tax
Specific tax (Parallel shift of the supply curve)
Ad Valorem (Pivotal shift of the supply curve
Good is taxed at a certain percentage based on the value of the product. —> Higher the price the higher the tax per unit
Fixed amount of tax charged per unit regardless of the price of the good