Disequilibrium Government Intervention Price Controls Do they really work? Or just political folly?

What is Disequilibrium? Disequilibrium is when prices are not trading at equilibrium price. Why? There are two main reasons: Natural occurring shortages and surpluses Government interferences

Why get involved? Unfairly high prices for Consumers Unfairly low prices for Producers Begin to feel political pressure to act

Price Floor: Look up Price is artificially set above Equilibrium See page 113 Fig 6.6A

How is it Used? Push prices It is used to prevent prices from going too low for producers to make any money. Externality: causes a surplus and really does the opposite of what is intended Surplus puts downward pressure on prices

Examples: Minimum wages Farm/Production Subsidies Who is Supply and Who is Demand in job market? Boss is Consumer of Labor = Demand Worker is Producer of Labor = Supply Price Floor See p 113 Fig 6.6A

How does subsidy or price floor work? Legally cannot pay workers below minimum wage Creates surplus of workers at higher wages Pay farmers/ manufacturers to grow/make certain things Creates higher priced goods & Services Corn for food or hybrid/ electric cars

Price Ceilings: Look Down A price set artificially below the Equilibrium price. Equilibrium Price Ceiling

How is Ceiling used? Intented to push prices down Used to prevent prices from going too high. Externality; creates shortage of intended good or service. Shortage puts upward pressure on prices

Example Housing : Rent Ceiling Who is the Demand and Supply of Housing market? Renters = Demand Landlords = Supply Price Ceiling See p 113 Fig 6.6B