examples of price controls price controls and natural gas shortages minimum wage production quotas...
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Examples of Price Controls
Price controls and natural gas shortages
Minimum wage
Production quotas
Price supports
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Natural Gas
In 1954, regulation of wellhead price of natural gas introduced
In the 1970s, price ceiling became binding
In the 1980s, price controls lifted
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The Natural Gas Market in 1975
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2$
20 )(Tcf
)(mcf
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Shortage
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Welfare Effects of Price Controls
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B
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Deadweight Loss and Gains From Price Controls in 1975
Consumers: gain A and lose B
Producers: lose A and C
Total: lose B and C
6.17$4.018 BA billion
19$118 CA billion
4.1$ CB billion
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Minimum Wage
1938 FDR introduces minimum wage with Fair Labor Standards ActFederal minimum wage: $4.25 in 1996, $5.15 in 1999Covered about 10 million Americans in 1997
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Minimum Wage
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ntUnemployme
A BC
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Minimum Wage
Firms (“Consumers”): lose A and B
Workers (“Producers”): gain A and lose C
Total deadweight loss: B+C
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Production Quotas
European Union keeps price of certain agricultural products (milk) relatively high by imposing production quotas to each member country
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Production Quotas
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Production Quotas
Farmers (“Producers”): gain A and lose C
Consumers: lose A and B
Total deadweight loss: B+C
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Price Supports
The government can keep the price of certain products relatively high by buying whatever amount is needed to keep the market price at that levelUS: dairy products, corn, peanuts, tobacco
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Price Supports
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Price Supports
Farmers (“Producers”): gain A, B, and C
Consumers: lose A and B
Government spends:
Total deadweight loss:
)( targ pD
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