Econowaugh AP: Government Intervention 3

Sunday, September 14, 2014

Government Intervention 3 - Price Ceilings

Price Controls - Price Ceilings

Conversations welcome -

Price Controls - refer to the setting above or below the market equilibrium (binding) by the government. Price controls result in shortages and surpluses.

mjmfoodie video - Price floors and ceilings -

Price Ceilings

Price Ceiling (max price), refers to the setting of the price lower than the market equilibrium by the government and no seller is allowed to sell the goods at a higher price than the maximum price.

Remember - (Ceilings are low)

Ceilings are meant to help the consumers,,, with lower prices. Remember, the lower prices mean that quantity demand will increase, but from the producers standpoint lower prices are a incentive to supply less. So with a high quantity demanded and low quantity supplied we naturally have shortages.

Reasons for Price Ceilings:

To protect (help Buyers so that lower income households can afford the good or service. Ex. food price controls and rent controls.
to lower the price of goods that the government deems unreasonably high.

Impacts of Price Ceilings:

1. Non-Price rationing emerges - When a price ceiling is imposed, Qd exceeds Qs. Shortages occur. Therefore, sellers have to ration the goods using non-price rationing mechanisms, such as lines, first-come, first-served, nepotism (favors, me and mine first).

2. Underground Parallel Markets (Black Markets) - Those who cannot obtain the goods desired on the regular market may seek to buy the goods at higher prices at the black market. As the black market is unregulated and unlicensed, the purchasing of goods services may pose a health and safety risk.

3. Falling Quality of Goods - As producers are not allowed to sell goods at a price higher than the maximum price. they may try to lower the production costs to increase profit or cover costs. The quality of goods may be reduced.

4. Consumers might gain or loose - Consumers who are able to buy at the lower price of course are the winners. Since price ceilings notoriously cause shortages, some (those who show up late) find that the supply has all been bought and so they loose.

5. Loss in Social Welfare - The distortion in people being able to purchase or sell goods goods reduces producer and consumer surplus by the shaded (DWL = Dead Weight Loss) amount in the picture below.