Price Controls Ceilings and Floors Lesson 5 Sections

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 in 1970 s 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