Social Goals vs. Market Efficiency Econ 10/5

Warm Up For each scenario: (1) Draw a generic supply and demand graph; (2) shift supply or demand on the graph; and (3) describe what happens to the price and quantity. Market: ink pens Scenario: The price of ink increases. Scenario: Teachers say that only ink pens can be used in class. Scenario: The pen company found a more efficient way to make pens.

Price Controls Price Control: a government regulation establishing a maximum or minimum price to be charged for specified goods and services, especially during periods of war or inflation Two types: Price Ceilings Price Floors

Price Controls Why have price controls? Equity and security We give up efficiency and freedom to be more “fair” Once we have them it is hard to remove them Politics Price controls do not allow prices to adjust to equilibrium levels

Price Ceilings Price Ceiling: prices cannot legally exceed the upper limit Example: rent control in NYC Imposed ceiling: price falls to Pceiling, quantity supplied is less than quantity demanded = SHORTAGE

Price Ceilings Price ceilings benefit the consumer because the price is lower than what they would normally pay Are consumers better off? Maybe not Apartments may be converted to something else (office space, torn down and sold etc). There is high consumer competition because there is a shortage Are producers better off? Definitely no Total revenue is decreased No incentive to add more units or fix up units

Price Floor Price floors: prices cannot legally fall below imposed limit Example: Minimum wage, agricultural products Price above equilibrium  quantity supplied exceeds quantity demanded = SURPLUS