Price Floors and Price Ceilings

Discuss… What prices do you consider to be unfair because they are too high or too low? Should the government do something about these prices that some of you think are unfair?

Recall How are prices determined in a MARKET ECONOMY?

Refresh on Market System (aka ???) 1. We want prices to reflect peoples’ preferences 2. In competitive markets, buyers compete with other buyers and sellers compete with other sellers. 3. Everyone who is willing and able to buy at the market price gets the produce, while everyone who is willing and able to sell at that price can sell it.

But sometimes….Government regulates price! Price Floors: a legal minimum price for a good or service, or factor of production. Charging or paying a price below the price floor is illegal and can carry a penalty under the law. Examples? Price Ceilings: a price ceiling is a legal maximum price for a good, service, or factor of production

Okay…time to draw!

The Problem with price controls…. They can often create underground markets If the price floor minimum wage is truly too high for the market to bear, both workers and employers will choose to trade in the underground market. This is bad for government because it will not collect taxes on that income earned and it will have to spend resources to enforce the price floor.