2. LO 6.1 Calculate the effect of a price ceiling on the equilibrium price and quantity.
3. LO 6.2 Calculate the effect of a price floor on the equilibrium price and quantity.
4. LO 6.3 Calculate the effect of a tax on the equilibrium price and quantity.
5. LO 6.4 Calculate the effect of a subsidy on the equilibrium price and quantity.
6. LO 6.5 Explain how elasticity and time period influence the impact of a market intervention.
FEEDING THE WORLD, ONE PRICE CONTROL AT A TIME
In the spring of 2008, a worldwide food shortage caused food prices to skyrocket. In just a few months, the prices of wheat, rice, and corn shot up as much as 140 percent. In the United States, the number of people living on food stamps rose to the highest level since the 1960s. By June, low-income Americans were facing tough choices, as the prices of basics like eggs and dairy products rose. Many reported giving up meat and fresh fruit; others said they began to buy cheap food past the expiration date.1
Rising food prices caused trouble all over the world. The Economist magazine reported on the political fallout:
[In Côte d'Ivoire,] two days of violence persuaded the government to postpone planned elections.... In Haiti, protesters chanting “We're hungry” forced the prime minister to resign; 24 people were killed in riots in Cameroon; Egypt's president ordered the army to start baking bread; [and] the Philippines made hoarding rice punishable by life imprisonment. 2
Faced with hunger, hardship, and angry outbursts, many governments felt obliged to respond to the crisis. But what to do? Responses varied widely across countries. Many countries made it illegal to charge high prices for food. Others subsidized the price of basic necessities. In the United States and Europe, policy-makers tried to alleviate the shortage by paying farmers to grow more food. Were these responses appropriate? What, if anything, should governments do in such a situation?
Food is a