During a discussion several years ago on building a pipeline to Alaska to carry natural gas, the U.S. Senate passed a bill stipulating that there should be a guaranteed minimum price for the natural gas that would be carried through the pipeline. The thinking behind that bill was that, if private firms had a guaranteed price for their natural gas, they would be more willing to drill for gas and to pay to build the pipeline.

What type of government intervention does this example illustrate?

Answer (circle the correct answer):

Price floor

Price ceiling

Use D-S graph to show the effect of the above government intervention in the market for natural gas.

In your answer, label both axes, initial D and S, new D and S (if any), initial equilibrium, new equilibrium (if any), initial P and Q, new P and Q (if any), surplus (if any), shortage (if any).

Show where price floor or ceiling is in your graph

Show new Qs and Qd (if any).

Show where shortage or surplus of natural gas after the government intervention is.

Answer:

Would the suggested government intervention create a shortage, a surplus in the natural gas market, or would it have no effect in this market?

Answer: (circle the correct answer):

Shortage

Surplus

No effect in the market

The graph below shows market for gasoline, in which the government imposes a price ceiling (Pmax). To answer the questions below, write down letter(s) ONLY that you think correspond to the correct areas of CS, PS, etc. You do NOT need to calculate anything.

Figure 1. Demand and Supply in the Gasoline Market

Which area(s) show(s) CS at market equilibrium price?

Answer:

Which area(s) show(s) PS at market equilibrium price?

Answer:

Which area(s) show(s) TS at market equilibrium price?

Answer:

Which area(s) show(s) total net benefit to the society when price is at market equilibrium level?

Answer:

What is DW equal to when price is at market equilibrium level?

Answer:

Which area(s) show(s) CS when price ceiling is imposed?

Answer:

Which area(s) show(s) PS when price ceiling is imposed?

Answer:

Which area(s) show(s) TS when price ceiling is imposed?

Answer:

Which area(s) show(s) total net benefit to the society when price ceiling is imposed?

Answer:

Which area(s) show(s) DW when price ceiling is imposed?

Answer:

What has happened to overall economic efficiency in this country after the government has imposed price ceiling?

Answer: (circle the correct one)

It has increased It has decreased It has not changed
 

 

Transcribed Image Text:

P max A B D C MO E Figure 1. Demand and Supply in the Gasoline Market/ S D Q P max A B D C MO E Figure 1. Demand and Supply in the Gasoline Market/ S D Q