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Diclaimer: This is not a homework question. Every word of it was written originally by me.

Hypothetical Scenario

Alice is shopping for groceries and thinks the current price of bananas at $0.79/lb is a little too high for her budget. Alice calls Bob, her local legislator, and asks Bob to sponsor a bill that regulates the price of bananas to cost no more than $0.50/lb in the grocery store so Alice can afford to buy them.

Bob thinks this is a great idea because it will help more people (especially the poor and those on a fixed income) afford to buy more bananas — a very nutritious food.

Question

Is this bill to regulate the price of bananas really a good idea? What would be the impact of such a law if it were to pass?

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  • $\begingroup$ This seems to be a homework question. We pass on that. Moreover, it has nothing to do with actual bananas. So the title is misleading. $\endgroup$ – Bayesian Feb 4 '17 at 20:03
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    $\begingroup$ @Bayesian: The title reflects the question and the hypothetical scenario postulated therein. I can not see any harm in including the word "bananas" in the title to a question that contains a hypothetical scenario involving bananas. $\endgroup$ – FreeMarketUnicorn Feb 4 '17 at 20:09
  • $\begingroup$ @Bayesian: I am flattered you think so much of my question writing skills, but this is not a homework question. I have a minor in economics and graduated many, many years ago. The purpose of this question is to understand how to simplify many of my discussions with others and explain tbasic economic principles to lay people in a way consistent with modern thought and study of economics. Every word of this question is original and came from me, personally. I guarantee it. $\endgroup$ – FreeMarketUnicorn Feb 4 '17 at 20:13
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    $\begingroup$ The problem is under-specified - there's insufficient information to provide a meaningful answer .As such, it is unclear what you are asking. $\endgroup$ – 410 gone Feb 5 '17 at 7:51
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    $\begingroup$ If you want to ask "do price controls work", then ask that, once you've checked for duplicates. Show us what research effort you've made so far. And provide context that illustrates the real-world problem that you are trying to solve. "Does this real-world tool X work" is almost always going to be answered with "It depends; in some circumstances it works quite well; in others not so well". And that answer would be no use to anyone. $\endgroup$ – 410 gone Feb 5 '17 at 10:53
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enter image description here
(source: dineshbakshi.com)

As you can see in the graph, price controls policies create excess demand, therefore you will end up with shortage or you will import more bananas.

I'm not a banana expert, but I assume bananas are pretty inelastic. Also, banana supply is inelastic in the short run (they have already planted bananas), therefore the excess demand will be less than the graph shows.

Whatever the case, price control policies generate deadweight loss and it depends on the elasticities who loses more (consumer vs supplier). This market is no longer efficient and that impacts the welfare negatively.

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