Nguyen Thi Xuan Quynh - 1001584Nguyen Thi Kim Chau - 1001587| |
24 November 2010|
There are various types of government policy using only the tools of supply and demand. Price control is one of the tools that policymakers usually apply when the market price of a good or service is unfair to buyers or sellers. In this case, the government will intervene to reduce the market’s failure. Economic Intervention has two kinds: * Direct Intervention: the government affects the market price directly in the market for a specific good. * Maximum price regulation.
* Minimum price regulation.
* Indirect Intervention: the Government uses tools to affect the market price indirectly. In this paper, we will concentrate on Maximum Price Regulation.
Maximum price: A price ceiling set by the government or some other agency or in other words: It is a legal maximum on the price at which a good can be sold. The price is not allowed to rise above this level (although it is allowed to fall below it).
WHY SHOULD PRICE CEILING POLICY BE APPLIED?
Price ceiling policy is applied when the market for a necessary good is in equilibrium at a very high price, which may be harmful to the buyers. Its purpose is to protect buyers; and sellers are not allowed to sell the good at a price higher than the ceiling price set by the government.
HOW PRICE CEILINGS AFFECT MARKET OUTCOMES
There are two cases: Binding case and Non-binding case:
* Binding case: the policy applied to deal with the problem that has already happened. * Non-binding case: the policy applied as a preventive action to avoid the problem that may happen in future. In binding case, the ceiling price creates shortage which means that there are not enough goods to meet the demand in the market. Solutions to the problem of shortage:
* Supporting supply
* Reduce tax on sellers...