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Chapter 6
Market Efficiency
and Government
Intervention
Effectiveness of Price Floors
• To be effective, a price floor must be
set above the equilibrium price.
• Price floors in one market may effect
outcomes in other markets.
Price Ceiling
• Government mandated maximum price
above which legal trades cannot be
made
• Price ceiling is below equilibrium price.

Rent control
Impacts of Price Ceilings
• Shortage sustained
• Fewer exchanges
• Non-price rationing schemes

First come first served
• Buying & selling at prohibited prices

Black markets
• Tie in Sales

Pay certain amount for rent of the house and an
amount for renting the refrigerator
Quotas
• Maximum quantity of a good or service
that can be traded over a specific period
of time.

Used when the government determines
the equilibrium quantity would not be in
society's best interest
• For example: International trade
• Supply curve becomes vertical at this point
Figure 6.9 The Effect of a Quota on the
Market for Laptop Computers
The Effects of a Quota
• Quotas result in:

A transfer of consumer surplus (prices are
now higher ) to producer surplus

Deadweight loss
Can we do it? (number 12)
• Draw a supply and demand curve for
vitamins, with the equilibrium price at $10.00
per bottle.


Suppose that the government believes that this
price is too high to promote health among its
citizens, and installs a price ceiling of $8.00 per
bottle. Show the effect of this policy on consumer
and producer surplus, and label any deadweight
loss created by the policy.
Which consumers are better off with the price
ceiling in place? Are some consumers worse off?
If so, why?
Concluding Thoughts
on Market Efficiency
• Other potential sources of inefficiency:

Monopoly Power
• One seller
• Prices are higher and quantities produced are lower

Externalities
• Negative and positive

Public Goods and Common Resources
• When do you stop using a free good?
Chapter 6 homework
• Questions 6, 10, 14, and 16