Question 1: Price Controls

In some cases, the market system is not the best. One reason for this is that for some goods and services, such as health care and defense, people do not like the outcome of the market system. Another reason is that the market system is inefficient under some circumstances. When the market is not the best system, the government is often called on to allocate resources and goods. A price ceiling is a government mandated maximum price above which legal trades cannot be made. A price floor is a government mandated minimum price below which legal trades cannot be made. (a) What are some negative effects of price ceilings and price floors? (b) Explain with economic reasoning what would happen to the supply of health care services if the government put a price ceiling on the health care prices.

Question 2: Application of Supply and Demand Principles

Discuss three possible solutions for reducing traffic congestion on heavily used freeways (highways). Be sure to explain what effect each would have on the supply and/or demand for freeway space.