AP Economics

Mr. Bernstein

Module 8: Price Controls: Ceilings and Floors

October x, 2013

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AP EconomicsMr. Bernstein

Price Controls• A legal restriction on how high or low a market

price may go• Enacted by governments in response to political

pressures from buyers and sellers

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AP EconomicsMr. Bernstein

Price Ceilings• Examples• Resources during WWII• New York City apartments (rent control)• Food prices in Venezuela• Salary Caps in Major League Sports• Credit Card interest rate caps• Where would you like to see price ceilings?

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AP EconomicsMr. Bernstein

Modeling a $2 Price Ceiling on Tacos• Qd ~= 6

• Qs~= 4• Shortage = 2• Who benefits?• Notice the priceceiling is belowequilibrium on a graph

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AP EconomicsMr. Bernstein

Inefficiencies of a $2 Price Ceiling on Tacos• Inefficient Allocation to Consumers• Some willing to pay $5 get none, some unwilling to pay

$5 will be able to buy at $2

• Wasted Resources• Consumers spend time and other scarce resources

chasing shortages (incurring opportunity costs)

• Lower Quality Products• Black Markets

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AP EconomicsMr. Bernstein

Why do Price Ceilings Exist?• They do benefit some consumers!• Those with political clout gain

• Once in place, there is uncertainty about removal effects

• Government officials may not understand supply and demand effects

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AP EconomicsMr. Bernstein

Price Floors• Examples• Minimum Wage• Agricultural Products

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AP EconomicsMr. Bernstein

Modeling a Price Floor on Tacos• Excess Supply• Notice the pricefloor is aboveequilibrium priceon a graph!

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AP EconomicsMr. Bernstein

Inefficiencies of a Price Floor• Quantity Demanded falls due to price increase

• Quantity bought and sold falls, creating TU loss to society

• Producers willing to sell at equilibrium price may not be the ones lucky enough to make sales

• Inefficiently high quality products• Wasted Resources

• Producers may begin adding extravagant ingredients not even desired by buyers in market in equilibrium

• Illegal activity• ie working below minimum wage due to surplus labor supply• Encourages bribery and corruption of government officials

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AP EconomicsMr. Bernstein

Why do Price Floors Exist?• They do benefit some producers!• Those with political clout gain

• Once in place, there is uncertainty about removal effects

• Government officials may not understand supply and demand effects

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AP EconomicsMr. Bernstein

Defining Deadweight Loss“Losses associated with quantities of output that are

greater than or less than the efficient level, as can result from market intervention such as taxes, or from externalities such as pollution.” Krugman

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AP EconomicsMr. Bernstein

Defining Deadweight Loss: Price Floors

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AP EconomicsMr. Bernstein

Defining Deadweight Loss: Price Ceilings