Suppose the Australian government decides to implement a binding price ceiling for university fees in 2021....

Suppose the Australian government decides to implement a binding price ceiling for university fees in 2021.

A. Will this policy make the market more efficient? Why/why not? Explain your answer in 3-4 lines. [1.5 marks]

B. Are all students better off under this policy? Why/why not? Explain your answer in 2-3 lines. [1.5 marks

Solutions

Expert Solution

Price ceilings, floors, subsidies, and, taxes can create inefficiency. Price ceiling refers to a regulation making it illegal charging a price higher than a level decided and stated. For instance, rent ceiling. Consumer surplus increases. Inefficiency is the deadweight loss. This is the loss in total welfare (consumer surplus + producer surplus). Demand is excess, and, supply is short. The quantity supplied is lower at lower prices. Price ceilings are also used to correct market inefficiency. The price regulation aims to maximize total welfare. A large number of consumers can pay for the service. This happens in case of greater involvement of consumer groups.

Consumer surplus increases. Therefore, the students are always better off. A shortage of supply may make the set seeking admission less better off. Market conditions influence the level of price ceiling. A lower fee does increase the number of students the fee is now affordable for.

Rahul Sunny answered 1 year ago

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