Price Controls Ceilings and Floors Lesson 5 Sections 8, 9

Why Governments Control Prices There are times when the market price is considered unfair, to either the buyer, the seller, or both. Those who have market power (the ability to control prices) often use their power to create greater profits, called profiteering. The need for the government to intervene in these cases is call price controls, and can be in the form of price floors and price ceilings

Price ceiling A price ceiling is a barrier that keeps the price lower than the equilibrium point, as prices are not allowed to go higher than the price ceiling. An example of a price ceiling, Legal maximum price Resource prices during WWII Oil Prices in1970s California electricity New York City apartments

Price Ceilings

Price Ceiling Inefficiencies Inefficient Allocation to Consumers Some willing to pay more do not get the resource Wasted Resources (Waiting in line) Low Quality (Slums) Black Markets

Price Floors A Price Floor is a barrier that keeps a price higher than the equilibrium point. In other words, the price cannot go lower than the price floor. Minimum Wages Agricultural Products Air Travel Trucking

Price Floors

Price Floor Inefficiencies Low Quantity (fewer ‘sales’) Wasted Resources (unwanted surpluses) Inefficiently High Quality (value added) Airline service Illegal Activity

Minimum Wages Controversy Crain's New York Business, February 2012: "“Critics of [the minimum wage] proposal are making the same arguments as the last time the Legislature increased the minimum wage, in 2004. The hike to $7.15 an hour from the federal minimum of $5.15 was phased in over three years. If the change had a cataclysmic effect on businesses that depend heavily on minimum-wage workers, we certainly missed it. Objections . . .  while meriting consideration, are essentially objections to the very existence of a minimum wage, which has been a fixture in the U.S. since 1938 and has never stopped our economy from flourishing.”

Controlling Quantities Instead of regulating prices, it is also possible to control quantities. By limiting the supply of a product or service, this can prevent undesired economic consequences and increase quality. The legal system used to control quantities is by license, or quota

The Anatomy of Quantity Controls Demand Price Supply Price

Costs of Quantity Controls Quota The ‘Quota Rent’ Difference of prices Cost of quota The ‘Wedge’ Deadweight Loss