The price control

Question Five

a) The price control used by the Chinese government is price ceiling. The government regulation that makes it illegal to charge a price higher than a specified level is Price ceiling. There are two types of price ceilings: one is set above the equilibrium price and one that is set underneath. The one that is set above the equilibrium has no effect because it does not constrain the market forces. The one that is set underneath the equilibrium has a major effect on the market because it aims to prevent the price from regulating the quantities demanded and supplied. The Chinese government is setting the price ceiling below equilibrium price.

b)The price ceiling set below the equilibrium price has caused the market to be inefficient.

The price ceiling causes a shortage of the goods as the demand for it is higher than the quantity supplied, resulting in a shortage occurring in the market.

c) Consumer surplus and Producer surplus without price ceiling - With price cap -

With the price cap set below equilibrium price, both consumer surplus and producer surplus has decreased and a deadweight loss generates. This deadweight loss grows because of the inefficiency of the market as the quantity of the good demanded is greater than the quantity supplied.

d) The quantity of coal, petrol and diesel supplied in the China market is less than its quantity demanded. This will cause China to import goods from other countries to satisfy consumers wants and therefore, the demand of coal, petrol and diesel in other countries will increase causing the supply to also increase to reach equilibrium. The result will be a higher market price for other countries.

Question Six

a) Marginal private benefit is the benefit of producing an additional unit of a good or service. In this scenario, the marginal private benefit equals to 0. The marginal private benefit of each fishing boat is $20,000 per month. The marginal social cost of each fishing boat is $20,000 per month. This refers to the marginal cost calculated by the entire community. Marginal social benefit refers to the marginal benefit consumed by the general communities.

b) The equilibrium number of boats is 25 and the value of fish caught is 500. In the table of orange roughy caught, the supply of value of catch decreases after the value of boats had reached 25 boats. Hence, overfishing occurs when there are no regulations of orange roughy fishing in order.

c) The efficient number of boats value of orange roughy caught is 17.5.

d) The efficient value of orange roughy catch is at $500 000, $1 000 000, $1 500 000 and $200 000 because that's when Marginal Social Benefit equals to Marginal Social Costs. Hence their values being $100,000.

e) Individual transferrable quotas refers “to the production limit that is assigned to an individual who is free to transfer, that is sell, the quota to someone else”, achieving efficient use of common resources. In situations where “producers are difficult to monitor” or the marginal cost of producers are not similar to each other, the Individual transferrable quota system is thought of as, improving the situation at hand. This is shown in situations with “overfishing and efficient use of stock of the ocean fish”, showing it to be a very effective tool. The Coase Theorem “is a proposition that if property rights exist, a small number of people are involved in an externality, and transactions costs are low, then private transactions are efficient”. As a result of not meeting these requirements, the Coase solution is not available. Limitations such as these allow ITQs to be thought of as the more efficient tool over the Coase Theorem.

f) Australian and New Zealand citizens would agree on the ITQ, as they enable the inheritance of efficient political outcomes. Even though this may not be the case for the fishing industry, as “ITQs reduce the size of the fishing industry”, bringing the fishing industry to conflict with the ITQ.

g) The price of ITQ equals to zero dollars, as marginal cost and marginal benefit both equals 100 000 dollars, and a new equilibrium is reached when marginal benefit is equal to marginal cost.

Please be aware that the free essay that you were just reading was not written by us. This essay, and all of the others available to view on the website, were provided to us by students in exchange for services that we offer. This relationship helps our students to get an even better deal while also contributing to the biggest free essay resource in the UK!