Explain the impact of a price floor on market outcomes.

Discuss the consequences for different stakeholders when the government imposes a price ceiling on a market.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of price floor
• diagram to show the effect of a price floor
• explanation that a price floor can lead to excess supply in the market, inefficient resource allocation, government measures to dispose of a surplus and welfare impacts
• examples of a price floor being used.

NB A price floor to reduce consumption of a demerit good can be fully rewarded if the candidate approaches the question in this way.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

• definitions of stakeholders, price ceiling
• diagram to show the effect of a price ceiling
• explanation of how a price ceiling can affect consumers, producers and the government. Some consumers will experience a lower price and some will not be able to access the good, producers will experience a fall in revenues and the government will have the cost of administering the price ceiling
• examples of where price ceilings have been used
• synthesis or evaluation (discuss).

Discussion may include: consideration of how the product will be allocated and whether those in need are able to access the good after the imposition of a price ceiling, the effect on the quality of the product, the likelihood of underground (parallel) markets developing.

This question was generally well answered by candidates with some effectively explained theory on the effect price floors (minimum prices) on markets where they are used. The strongest responses considered the impacts on consumers, producers and governments in terms of higher prices, increased revenues and the cost of intervention buying. An effective use of the minimum price diagram was important to illustrate the answer as was an effective real-world answer and many students used agricultural markets to do this.

This question was generally well answered by candidates who often used the rental property market as an illustrative answer. Most students used an effective price ceiling diagram to explain the impact of the policy on consumers, producers and the government. The weakness in some answers was not to fully evaluate the consequences of the price ceiling. For example, the policy is good for the buyers who can actually buy the goods, but large numbers cannot if shortages develop because of the maximum price. Real world examples were applied quite well in this question with rent controls in cities such as New York and Berlin being used. A small number of students got price ceilings and price floors mixed up in parts (a) and (b) and this led to some low marks for those who made this mistake.