Price controls, regulation and government failure
Maximum and minimum prices
- maximum price — a legal ceiling set below equilibrium (e.g. rent control) → quantity demanded > supplied → a shortage.
- minimum price — a legal floor set above equilibrium (e.g. minimum wage) → quantity supplied > demanded → excess supply.
- A buffer stock steadies farm prices: buy and store when cheap, sell when dear.
Practice
A maximum price set below equilibrium causes:
Holding the price below equilibrium means demand exceeds supply — a shortage.
Regulation, provision, permits
- regulation — rules (bans, age limits, pollution limits).
- state provision — the government supplies a good directly (schools, hospitals).
- tradable permits — a cap on total pollution; clean firms sell spare permits to dirty ones.
Practice
Tradable pollution permits work by:
A cap fixes total pollution; trading lets the cap be met at the lowest overall cost.
Government failure
- Government failure is when intervention makes resource use worse:
- poor information (wrong tax/subsidy),
- high running cost,
- unintended results (a max price → a black market),
- political rather than efficient decisions.
Practice
An example of government failure is:
Government failure is intervention that worsens resource use — e.g. a price control causing a black market.
You've got it
Key idea
- maximum price (below equilibrium) → shortage; minimum price (above) → surplus
- buffer stock = buy cheap/store, sell dear; tradable permits cap pollution cheaply
- government failure = intervention that makes things worse (e.g. a black market)