Managing Prices

How are price system limitations dealt with? The price systems limitations sometimes lead governments to intervene in the market. Governments may set prices by establishing price ceilings and price floors that are intended to protect producers and consumers from dramatic price swings.

What governmental tools can be used? Price Ceiling – a government regulation that establishes a maximum price for a particular good –Rent control due to imbalance between supply and demand of rental property.

Negative effects of price ceilings- **By keeping rents low, potential profits for landlords and developers is kept low. –Fewer properties will be built (why build or buy property if no profit?). –Also, less money will be spent on maintenance (cant pass cost on to the renter). –Instead of increasing quantity of affordable housing, over time it reduces it.

Price Floors – government regulation that establishes a minimum level for prices –Government sets price for corn to help growers meet their financial obligations.

**Keeping prices for corn high means more potential profits for corn growers. –More corn will be grown to take advantage of high prices. –Surplus is maintained or increased.

What is the general consensus on the government intervening? Most economists advise against this. Interfering with normal supply and demand can cause unintended consequences. * Keeps markets from reaching equilibrium

P QD and QS D S E Price Floor Price Ceiling Creates Surplus Creates Shortage DS SD

Rationing-used when supply is very low. It is a system in which a government or other institution decides how to distribute a product. –Based on policy decisions instead of prices determined by supply/demand Unfair Expensive Creates Black Markets

Negatives of rationing- Unfair - Some people who want the product will not receive it, even though they may be able to pay good money for it. Expensive (compared to price system) – someone must carry out the decisions included in rationing. Price system does it automatically. Black Markets – goods are exchanged illegally at prices that are higher than officially established. –Since rationing doesnt completely satisfy consumer demand, black markets form. –You pay much higher price than others if you buy from black market –If prices are high due to price system, at least everyone has the same shot for the same price at the same time. **Also, unscrupulous people could counterfeit products