Problem 5 Price Controls

Suppose a huge snow storm has just hit Tulsa. Let's analyze the market for shovels. (a) what is likely to happen to the price of shovels? (b) draw a diagram showing the old and new equilibrium price and quantity for shovels. (c) Suppose the mayor of Tulsa thinks it is inhumane for the price of shovels to increase because of the storm and scolds firms for "price gouging". The mayor then makes it illegal for shovels to increase in price from their equilibrium price before the storm. What is likely to happen? Will everyone in Tulsa be able to dig out of the storm? (d) Using the concepts of consumer and producer surplus, show whether the city of Tulsa is worse or better-off because of the mayor's decision in terms of total surplus. . . . . . . . . . Miscellaneous Short Answer Questions

(a) When is an outcome (allocation) Pareto efficient? (b) Give two conditions that can cause markets to fail (ie. not produce a Pareto efficient outcome) (c) What is the most efficient way to raise government revenue. Is it feasible? (d) How can a government raise tax revenue in a per-unit tax while minimizing the size of dead-weight loss.