HL Economics

Chapter 5: Government Intervention

#35 Select a product and create a market supply and demand diagram.

#36 Select a product and create a market supply and demand diagram.

#44 What is the effect of price control on allocative efficiency?

Price control has an effect on the allocative efficiency due to its prevention of the equilibrium between the marginal cost and benefit. Because an equilibrium between the demand and supply of the good is not achieved, the government will place a price floor or price ceiling to help the surplus or shortage. The allocative efficiency becomes ineffective without an equilibrium between the demand and supply because it becomes difficult for both the producers and consumers to benefit.

#46 Evaluate the effectiveness of rent control.

Rent control is an example of price ceiling which is placed “to reduce the cost of housing for lower-income citizens. Although the idea of the government implementing such law may be positive, this policy has a wide range of effects. One effect is how the renters could provide the owner with a higher price outside the agreement, thus increasing the cost of the housing. Also, with the decrease in the incentive for the owners to maintain the quality of the house, the safety of the building may decrease as well. Since the price ceiling would limit their revenue, they would act to decrease the costs of the building in order to keep a constant profit. Thus, lower quality resources will be used which will result to an unsafe housing for renters. Yet because the cost of the housing is lowered, the suppliers will supply less for the building to be built. Following the laws of supply and demand, although the supply has decreased, the demand for these building will increase as the price is lower. With such a high demand and a low supply, this would result to another negative effect of shortage.

(p.122)

1. Explain, using a diagram, the effect of a specific tax on various stakeholders.

A specific tax charges a specific amount to be paid for ever unit of a good sold, therefore the amount of tax is an absolute value.

These taxes have various effects on each stakeholder such as: raising the products prices,  reducing output of products, market size shrinking, producers and consumers suffer, and the government benefits.

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