Lectures in Microeconomics-Charles W. Upton

Price CeilingsP

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Price Ceilings

The effect of a price ceiling

• An unregulated product sells for Po. Sales are Qo.

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Qo

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D

Price Ceilings

The effect of a price ceiling

• An unregulated product sells for Po. Sales are Qo.

• Suppose the government sets a maximum price Pmax

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Po

Qo

S

DPmax

Price Ceilings

The effect of a price ceiling

• An unregulated product sells for Po. Sales are Qo.

• Suppose the government sets a maximum price Pmax

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Po

Qo

S

DPmax

Shortage!

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Price Ceilings

The effect of a price ceiling

• An unregulated product sells for Po. Sales are Qo.

• Suppose the government sets a maximum price Pmax

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Qo

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DPmax

Shortage!

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There is more to the story

Price Ceilings

The effect of a price ceiling

• People try to evade the ceiling

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Price Ceilings

The effect of a price ceiling

• People try to evade the ceiling.

• If suppliers, they shift their supply curve up by $Evade

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DPmax $Evade, the

cost of evading

Price Ceilings

The effect of a price ceiling

• People try to evade the ceiling.

• If suppliers, they shift their supply curve up by $Evade

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Qo

S

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Price Ceilings

The effect of a price ceiling

• People try to evade the ceiling.

• If suppliers, they shift their supply curve up by $Evade

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Price goes up

Price Ceilings

The effect of a price ceiling

• People try to evade the ceiling.

• If suppliers, they shift their supply curve up by $Evade

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No Shortage!

Price Ceilings

The effect of a price ceiling

• How big is this shift?

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Price Ceilings

The effect of a price ceiling

• How big is this shift?

• If the regulations are a joke, $Evade is small.

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S

DPmax

Q1

Price Ceilings

The effect of a price ceiling

• How big is this shift?

• If the regulations are a joke, $Evade is small.

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Po

Qo

S

DPmax

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Small increase over market price.

Price Ceilings

The effect of a price ceiling

• How big is this shift?

• If the regulations are tough and toughly enforced, $Evade can be quite large

P

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Po

Qo

S

DPmax

Q1

Price Ceilings

The effect of a price ceiling

• How big is this shift?

• If the regulations are tough and toughly enforced, $Evade can be quite large

P

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Po

Qo

S

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Then the regulations have a major impact.

Price Ceilings

The effect of a price ceiling

• How big is this shift?

• If the regulations are tough and toughly enforced, $Evade can be quite large

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Po

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Q1

Moral: if you are given the job of enforcing a price

ceiling, don’t work too hard at your job.

Price Ceilings

End

©2004 Charles W. Upton