PRICE CEILINGS AND PRICE FLOORS E 18 19

PRICE CEILINGS AND PRICE FLOORS E. 18, 19, 20

OBJECTIVES • Students will… – Understand the effects of price ceilings and price floors – Describe the positive and negative consequences of price ceilings and price floors. – Demonstrate how government wage and price controls, such as rent controls and minimum wage laws, create shortages and surpluses.

WARM UP “In the Race to Buy Concert Tickets, Fans Keep Losing” By Ellen Rosen Published 6 October 2007 in the New York Times Lisa Senauke, a Bruce Springsteen fan since 1973, tried to get tickets to his Oct. 26 concert in Oakland, Calif. The tickets were to go on sale at 10 a. m. on Sept. 17, and starting at 9: 58 a. m. , she logged into her Ticketmaster. com account, credit card in hand. But though she tried again and again for the next hour to buy tickets, she was always told the same thing: nothing available. Ms. Senauke’s frustration is not isolated. The coming concerts of…Miley Cyrus…sold out in minutes. And the same thing happened with tickets to recent reunion tours by the Police and Van Halen. While some fans just quietly give up, others have complained to government officials, particularly after they found tickets to the same concerts available -- sometimes at many times the face value -- on secondary sellers like Stubhub. com and Tickets. Now minutes after

MARKET FOR TICKETS • In terms of supply and demand, what problem exists in the market for concert tickets? • Is this in market equilibrium? – How do you know? • What is one idea you can think of to help solve this problem?

GRAPH… Demand (thousands) Supply (thousands) • Use the data and graph to crate a market graph for tickets $20 90 10 $40 80 20 $60 70 30 $80 60 40 $100 50 50 $120 40 60 $140 30 70 $160 20 80 $180 10 90 Price ($) • Plot the data points • Suppose Miley Cyrus only charges $60 per ticket. • What is the equilibrium price and quantity in this market? • If the price Miley charges for each ticket is below E, why doesn’t she raise her prices?

PRICE CEILINGS • Governments occasionally intervene in the free market by creating a price ceiling – maximum price sellers are allowed to charge. • The Price Ceiling – Gov’t may decide to limit prices to help consumers – Price ceilings are only effective if placed below equilibrium – Price ceilings cause shortages • Shortages – Not all demand can be satisfied by supply – Market forces are unable to push the price back to equilibrium

PRICE CEILING EXAMPLE • Apartments in New York City – Gov’t limits the price apartment owners can charge their tenants. – Why? S Equilibrium Price Ceiling D In this example, 5 million apartments are demanded, but only 2 million are supplied. There is a shortage of 3 million apartments

PRICE CEILINGS ARE INEFFICIENT • Missed opportunities or transactions • Inefficient Allocation: Consumers who really want the good don’t get it, and those who only care a little do get it. – In NYC, some ppl desperately need an apartment. Current residents, however, might want to move but don’t want to give up their spot. • Wasted Resources: Consumers spend extra time and money dealing with shortages – Those who need an apartment in NYC end up spending a lot of time and money looking for available apartments. • Inefficiently Low Quality: due to lower prices, suppliers offer a low-quality product even though buyers prefer higher quality – B/c price ceilings limit landlord’s revenue, they will often cut cost in undesirable ways (neglecting the building). • Black Markets: due to shortages, goods may be exchanged illegally at a higher price – NYC apts will often be sublet to others illegally, or the landlord may allow a tenant to rent form them in exchange for bribes.

PRICE FLOORS • Gov’t intervention – price floors create a minimum price buyers are required to pay. – Gov’t may decide to raise prices to help producers – Price floors are only effective if placed above equilibrium – Price floors cause surpluses S Price Floor • Market for Milk • The gov’t sets a minimum price for milk in order to help America’s dairy farmers • Price floor ensures that each gallon costs at least $2 (binding) • 1100 gallons are supplied, but 300 million are demanded. Surplus of…? D

THERE IS A PRICE FLOOR SOME OF YOU ENCOUNTER EVERY DAY… DO YOU KNOW WHAT IT IS? ? ?

PRICE FLOORS ARE INEFFICIENT • Price floors are inefficient because there are missed opportunities for transactions. • Inefficient Allocation – suppliers who are willing to sell at a lower price are not able to do so. – Minimum wage is price floor where workers are the supply. Employers are willing to hire more people but wages are too high. • Wasted Resources – the resources used to create surpluses are essentially wasted. – Some crops have price floors; the surpluses are either burned or are allowed to go bad • Inefficiently High Quality – due to high prices, suppliers offer a high-quality product even though buyers prefer lower quality. – Int’l airfare used to be regulated with price floors; lavish in-flight service vs cheap airfare • Illegal Activity – due to surpluses, goods may be exchanged illegally at a lower price. – To get around the minimum wage law, workers who are desperate for a job are sometimes

QUANTITY CONTROLS GOV’T INTERVENTION – QUOTAS; CONTROLLING # • Government can set a quota limit by issuing licenses to suppliers. – Many fish in the US are regulated through quotas. Fishermen must receive a license in order to catch a predefined amount of fish. • If quota is less than equilibrium, a wedge is driven between the Demand $ and the supply $ – Buyers pay a higher price than the price received by seller – Difference in prices is the quota rent – earnings made from the right to sell the good • Consumers are charged $7; because the license is a hot commodity, a license holder could sell the license for $4, which is the value of the wedge.

• https: //www. youtube. com/watch? v=1 Ez. Y 4 Vl 460 U

PROS AND CONS OF PRICE CONTROLS WHAT DO YOU THINK?

Pros Cons Price ceilings help keep prices Causes persistent low for consumers shortages/surpluses Price floors help suppliers make more money Resources not allocated efficiently Quantity controls may have environmental benefits Emergence of black market or other illegal activities Price controls can correct allocation problems Special interest groups push for prices controls for political reasons

WHITEBOARD ASSESSMENT

• What is a price control placed above the equilibrium price? – Price floor • A price ceiling will usually result in a a) Surplus b) Quota rent c) Wedge • This occurs when the quantity supplied exceeds the quantity demanded. d) Shortage – Surplus • This occurs when the quantity demanded exceeds the quantity supplied – shortage • A price floor will usually result in a a) Surplus b) Quota rent c) Wedge • Price controls usually result in this, meaning mutually beneficial transactions are unable to take place. – Inefficient markets d) shortage

• All of the following are inefficiencies cause by a price ceiling EXCEPT a) People must spend extra time and money to find someone willing to make a transaction b) Suppliers provide a low-quality product even though consumers prefer higher quality • Suppose there is a quota limit for how many NYC taxis can operate at any given time. At the quota quantity, consumers are willing to pay $15/taxi fare. However, drivers need $9/fare. What is the quota rent per taxi fare in this scenario? c) Damage done to the environment a) $5 d) Black market emerges b) $6 c) $9 d) $15 • All of the following are inefficiencies cause by a price floor EXCEPT a) Surpluses must be destroyed or thrown away b) Sellers who want to sell at a lower price are unable to do so • One major argument in favor of price ceilings and price floors is that a) They can correct allocation problems in certain markets b) They cause black markets to emerge c) Buyers who want to purchase at a higher price are unable to do so c) A small group of people benefit while a large group of people suffer d) A black market emerges d) They create unnecessary shortages and surpluses.

ASSIGNMENT (QUIZ GRADE) • Read the NPR article about minimum wage • Then, write 1 -2 paragraphs summarizing the article and citing evidence, arguing your opinion of minimum wage. – Are you for it or against it? – Should it be increased? – Should it be decreased?