Midterms: Government Policy

• are usually enacted when policymakers believe the market price is unfair to buyers or sellers

  price controls
• Two broad kinds of price controls of the governmen

  1. price ceilings
  2. price floors
• the maximum price a good or service is bought or sold

  price ceilings
• the minimum price a good or service is bought or sold

  price floors
• The price ceiling is not binding if set above price
• The price ceiling is binding if set below the equilibrium the equilibrium price, leading to shortage
• effects of price ceilings

  1. shortages
  2. non-price rationing
• this is whereas a price ceiling places a legal maximum on prices, a price floor places a legal minimum.

  price floors
• The price floor is binding if set above the equilibrium the equilibrium price, leading to a surplus
• true or false A price floor prevents supply and demand from moving toward the equilibrium price and quantity.

  true
• true or false:


  When the market price hits the floor, it can fall no further, and the market price equals the floor price
• a binding price floor causes a

  surplus
• a binding price ceiling will cause a

  shortage