The Inefficiency of Government Actions in the Economy

NAVEED KARIM BAKSH 20124656 Section 26

Index
PRICE CEILING 3

PRICE FLOOR

TAXATION

Price Ceiling:
A price ceiling is a regulation that makes it illegal to change a price higher than a specified level. When a price ceiling is applied to a housing market, it is called a rent ceiling.

Pros and Cons of Price Ceiling: Pros: 1. Price ceilings help prevent suppliers from engaging in price gouging, or charging outrageouslyhigh prices for limited goods or services simply because they are able to. 2. Price ceilings help prevent suppliers from engaging in price gouging, or charging outrageously high prices for limited goods or services simply because they are able to. Cons: 1. Price ceilings can have negative impacts on the marketplace too. Suppliers are discouraged from producing more of an item when they cant set their own prices, therefore, supply of key resources will decline, reducing availability to the market. 2. Price ceilings also reduce the quality of products, as suppliers have less financial resources to reinvest in their business. In General: If the rent ceiling is set above the equilibrium rent, it has no effects. The market works as if there is no ceiling. If the rent ceiling is set below the equilibrium rent it creates a shortage in the market.

Inefficiency of rent ceiling: A rent ceiling set below the equilibrium rent leads to an inefficient production of housing services.

As we can see the graph shows the inefficiency of the rent ceiling because: - A deadweight loss arises - Producer surplus shrinks - Consumer surplus shrinks According to the graph the producers and the consumers surplus both decrease by 4 units. Moreover this leads to a deadweight loss which occurred due to not having an equal supply and demand. While the pink area in the graph shows the potential loss from housing search and potential customers.

Price Floor:
A price floor is a regulation that makes it illegal to trade at a price lower than a specified level. When a price floor is applied to labor markets, it is called a Minimum wage.

Pros and Cons of Price Floor: Pros: For the government, the floor price is useful as they can use it to deter people from buying certain goods such as alcohol and tobacco. They can intervene on the market and set a minimum price at which the good must be sold at or above.

Cons: Sometimes an illegal market can develop where the good is sold at the original market price. For example, in the UK it is not uncommon to find small dealers that illegally import large stocks of cigarettes and then sell them for about half the price of cigarettes that can be bought in shops.

In General: If a minimum wage is set below the equilibrium wage rate there will not be any effect to the labor market. If a minimum wage is set above the equilibrium wage rate there will be some effects to the labor market.

Inefficiency of minimum wage: A minimum wage set above the equilibrium wage rate decreases the quantity of labor supplied.

As we can see the graph shows the inefficiency of minimum wage because: - A deadweight loss arises - Workers surplus shrinks - Firms surplus shrinks

Taxation:
A tax is a sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc. Pros and Cons of Taxation: Pro: 1. It enables the government to ensure that services to citizens are available, and necessary expenditures on infrastructure (roads, etc.) are met without the need for excessive bond issuances. 2. If Government taxes the rich more, then it will eventually lead to decrease in the gap between the rich and poor. Cons: 1. When taxes rise, the citizens and businesses of a country pay more of their income to the government. This can create a disincentive to invest in businesses. This discouragement can have many dire effects on a country related to the retardation of its economy. 2. High taxes can also stifle the motivation of individual workers.As citizens work harder and earn more money, more and more of their income is given to the government. This can appear unfair and lead to a decline in a country's morale, but can also provide a disincentive for productivity.

Inefficiency of taxation: Imposing a tax can create inefficiency.

As we can see the graph shows the inefficiency of taxation because: - The tax revenue takes part in the total surplus - Deadweight loss arises