PRICE CEILINGS l At times the government decides the market price of a product is unfairly high. l In these cases the government may impose a price ceiling. l A price ceiling is a price set by law that is below the equilibrium price
PRICE CEILINGS l Price ceilings are imposed when people decide the market price is unfair or is somehow being manipulated by suppliers. l History has shown that price ceilings cause more problems than they solve. l What happens when a price ceiling is imposed
PRICE CEILINGS l The table on the next slide shows the market for video rentals that weve been using as an example. l Examine the consequences of setting the legal price of video rentals at $2.00
CONSEQUENCES OF PRICE CEILINGS l Not to hard to see that the price ceiling causes a shortage of the product, in this case of 200 units a day. l Unless the price ceiling is enforced in some way suppliers will begin to sell the product at the higher market price.
CONSEQUENCES OF PRICE CEILINGS l Some administrative and legal apparatus needs to be set up to monitor what people are doing and to take legal action against them to support the price ceiling l This costs money and creates a new class of lawbreakers. But, failure to enforce the price ceiling will quickly lead to its failure.
CONSEQUENCES OF PRICE CEILINGS l Additionally, the shortage must be dealt with. Some scheme for rationing the available supply needs to be developed. l This also requires an administrative apparatus and costs money and is subject to corruption as well.
CONSEQUENCES OF PRICE CEILINGS l Plus, the shortage is never resolved since the price ceiling discourages additional production and encourages additional consumption. l Think about these things before you support government price controls on gasoline/ l Needless to say, mainstream economists dont like price ceilings.
PRICE FLOORS l Price floors are the opposite of price ceilings. In this case the price is kept above the equilibrium market price l The effects of price floors are simply the opposite of price ceilings
PRICE FLOORS l Considerable experience with price floors exists in the form a agricultural price supports l Price supports keep the price above equilibrium generating surplus production l Read the case in point on page 91 for insight into price floors