Download Lesson 5 - Price Controls: Ceilings and Floors

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
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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