Presentation is loading. Please wait.

Presentation is loading. Please wait.

Price and Quality Controls. Price Controls Legal restrictions on how high or low a market may go Legal restrictions on how high or low a market may go.

Similar presentations


Presentation on theme: "Price and Quality Controls. Price Controls Legal restrictions on how high or low a market may go Legal restrictions on how high or low a market may go."— Presentation transcript:

1 Price and Quality Controls

2 Price Controls Legal restrictions on how high or low a market may go Legal restrictions on how high or low a market may go Price Ceilings is the maximum price sellers are allowed to charge for a good or service Price Ceilings is the maximum price sellers are allowed to charge for a good or service Price Floor is the minimum price buyers are required to pay for a good or service Price Floor is the minimum price buyers are required to pay for a good or service

3 Price Ceilings Typically imposed during a crisis because these events often lead to sudden price increases that hurt many people but benefit a few Typically imposed during a crisis because these events often lead to sudden price increases that hurt many people but benefit a few Ex. WWII – aluminum and steel in demand for the war and price controls were in place to avoid a few earning large profits Ex. WWII – aluminum and steel in demand for the war and price controls were in place to avoid a few earning large profits Ex. Oil embargo in 1973, rent controls Ex. Oil embargo in 1973, rent controls

4 The Market for Apartments in the Absence of Government Controls $1,400 1,300 1,200 1,100 1, Quantity of apartments (millions) Monthly rent (per apartment) D E S $1,400 1,300 1,200 1,100 1, Quantity supplied Quantity demanded Monthly rent (per apartment) Quantity of apartments (millions)

5 The Effects of a Price Ceiling $1,400 1,200 1, Quantity of apartments (millions) Monthly rent (per apartment) D S E BA Housing shortage of 400,000 apartments caused by price ceiling Price ceiling

6 Effects of Price Ceilings Dont always cause a shortage Dont always cause a shortage If a price ceiling is set above the equilibrium price, it wont have any effect If a price ceiling is set above the equilibrium price, it wont have any effect But sometimes price ceilings can cause inefficiency But sometimes price ceilings can cause inefficiency

7 How Price Ceilings Cause Inefficiency The effects of Rent Controls: 1.Reduces the quantity of apartments rented below the efficient level 2.Leads to misallocation of apartments among would-be renters 3.Leads to wasted time and effort as people search for apartments 4.Leads to landlords maintaining apartments in inefficiently low quality or conditions

8 How Price Ceilings Cause Inefficiency Rent controls reduce the number of apartments supplied and they reduce the number of apartment rented Rent controls reduce the number of apartments supplied and they reduce the number of apartment rented

9 A Price Ceiling Causes Inefficiently Low Quantity $1,400 1,200 1, Quantity of apartments (millions) Monthly rent (per apartment) D S E Price ceiling Quantity supplied with rent control Quantity supplied without rent control Deadweight Loss is the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity Deadweight Loss is the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity.

10 Deadweight Loss Key concept in economics Key concept in economics Occurs whenever an action or a policy leads to a reduction in the quantity transacted below the efficient market equilibrium quantity Occurs whenever an action or a policy leads to a reduction in the quantity transacted below the efficient market equilibrium quantity Deadweight loss is a loss to society – a reduction in the total surplus, a loss in surplus that accrues to no one as a gain Deadweight loss is a loss to society – a reduction in the total surplus, a loss in surplus that accrues to no one as a gain Not the same as a loss in surplus to one person that then accrues as a gain to someone else – that is a transfer of surplus

11 Price Ceilings Causing Inefficient Allocation to Consumers 2.2 million people wanted to rent an apartment at $800 month 2.2 million people wanted to rent an apartment at $800 month Only 1.8 million apartments are available Only 1.8 million apartments are available Of the 2.2 million people, Of the 2.2 million people, – some want an apartment so bad they will pay anything – Some are only willing to pay a low price and will wait for one to be available An efficient allocation of apartments would reflect these differences, one who wants one urgently will get one and people who can wait will not get one BUT….this does not happen An efficient allocation of apartments would reflect these differences, one who wants one urgently will get one and people who can wait will not get one BUT….this does not happen

12 Inefficient Allocation to Consumers Instead, in an inefficient distribution of apartments, people who arent in a hurry will get one and those who are, wont. Instead, in an inefficient distribution of apartments, people who arent in a hurry will get one and those who are, wont.WHY????

13 Price Ceilings Causing Wasted Resources Price ceilings typically lead to inefficiency in of wasted resources Price ceilings typically lead to inefficiency in of wasted resources People expend money, effort, and time to cope with the shortages caused by the price ceiling People expend money, effort, and time to cope with the shortages caused by the price ceiling Ex. 1979, price controls on gasoline Ex. 1979, price controls on gasoline – Lead to shortages that forced many to spend hours each week waiting in lines and missing out on wages and leisure time – opportunity cost

14 Price Ceilings Causing Goods to be of Low Quality Sellers offer low-quality goods at a low price even though buyers would rather have higher quality and are willing to pay for it Sellers offer low-quality goods at a low price even though buyers would rather have higher quality and are willing to pay for it

15 Price Ceilings Causing Illegal Activities Price Ceilings can lead to goods being bought and sold illegally Price Ceilings can lead to goods being bought and sold illegally Black Markets are a market in which goods or services are bought and sold illegally – either because it is illegal to sell that at all or because the prices charged are legally prohibited by a price ceilings Black Markets are a market in which goods or services are bought and sold illegally – either because it is illegal to sell that at all or because the prices charged are legally prohibited by a price ceilings

16 Why are there Price Ceilings? 1.They do benefit some people 2.Buyers may not even know the goods they are using/buying have price controls 3.And (according to textbooks and economists) government officials do not understand supply and demand analysis

17 Price Floors Government intervention to push market prices up instead of down Government intervention to push market prices up instead of down Minimum Wage is a legal floor on the wage rate which is the price of labor Minimum Wage is a legal floor on the wage rate which is the price of labor

18 The Market for Butter in the Absence of Government Controls $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $ Quantity of butter (millions of pounds) Price of butter (per pound) Quantity supplied Quantity demanded Quantity of butter (millions of pounds ) $ Price of butter (per pound) D S E

19 The Effects of a Price Floor $ D S E BA Butter surplus of 3 million pounds caused by price floor Price floor Quantity of butter (millions of pounds) Price of butter (per pound)

20 Effects of a Price Floor Price floors do not always lead to an unwanted surplus Price floors do not always lead to an unwanted surplus Some price floors are irrelevant Some price floors are irrelevant If a price floor is binding (permanent) what happens to the unwanted surplus? If a price floor is binding (permanent) what happens to the unwanted surplus?

21 Price Floors Causes Low Quantity Price floors raise the price of a good to consumers Price floors raise the price of a good to consumers Price floors also reduce the quantity of that good demanded – sellers cant sell more units of a good than buyers are willing to pay Price floors also reduce the quantity of that good demanded – sellers cant sell more units of a good than buyers are willing to pay Price floors reduces the quantity of a good bought and sold below the market equilibrium quantity and leads to a deadweight loss Price floors reduces the quantity of a good bought and sold below the market equilibrium quantity and leads to a deadweight loss

22 A Price Floor Causes Inefficiently Low Quantity $ D S E Quantity demanded with price floor Quantity demanded without price floor Deadweight loss Price floor Quantity of butter (millions of pounds) Price of butter (per pound)

23 Price Floors Causes Inefficient Allocation of Sales Among Sellers Price ceilings can lead to inefficient allocation Price ceilings can lead to inefficient allocation Price floors can cause inefficient allocation of sales among sellers – those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it Price floors can cause inefficient allocation of sales among sellers – those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it

24 Price Floors Cause Wasted Resources Government purchasing of unwanted surplus of agricultural products Government purchasing of unwanted surplus of agricultural products Surplus is destroyed or it is stored and will go bad eventually Surplus is destroyed or it is stored and will go bad eventually Price floors also lead to wasted time and effort Price floors also lead to wasted time and effort – Minimum wage jobs

25 Price Floors Cause Inefficiency in the Quality of Goods Produced Sellers offer high-quality goods at a high price, even though buyers would prefer a low quality at a lower price Sellers offer high-quality goods at a high price, even though buyers would prefer a low quality at a lower price People want quality but only if it is worth the price People want quality but only if it is worth the price

26 Price Floors Cause Illegal Activity Price floors cause incentives for illegal activity Price floors cause incentives for illegal activity Working off the books for employers Working off the books for employers Bribing Government Inspectors Bribing Government Inspectors

27 Controlling Quantities Quantity control (quota) is an upper limit on the quantity of some good that can be bought or sold. Quantity control (quota) is an upper limit on the quantity of some good that can be bought or sold. Ex. Taxi Medallions Ex. Taxi Medallions

28 Controlling Quantities The total amount of the good than can be transacted under the quantity control is a quota limit The total amount of the good than can be transacted under the quantity control is a quota limit Controlling quantity is done though a license, an owner is given the right to supply a good Controlling quantity is done though a license, an owner is given the right to supply a good

29 The Market for Taxi Rides in the Absence of Government Controls $ D S E Quantity of rides (millions per year) Fare (per ride) $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $ Quantity of rides (millions per year) Fare (per ride) Quantity supplied Quantity demanded Demand Price – a given quantity is the price at which consumers will demand that quantity Supply Price – a given quantity is the price at which producers will supply that quantity

30 Controlling Quotas NYC limits the quantity of taxi rides to 8 million per year (assumption for analysis) NYC limits the quantity of taxi rides to 8 million per year (assumption for analysis) Medallions are available to selected drivers for a total of 8 million rides Medallions are available to selected drivers for a total of 8 million rides Medallion holders can drive their own taxi or rent their medallions to others for a fee Medallion holders can drive their own taxi or rent their medallions to others for a fee

31 Effect of a Quota on the Market for Taxi Rides $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $ Quantity of rides (millions per year) Fare (per ride) Quantity supplied Quantity demanded A B $ D S E Deadweight loss The wedge Quota Quantity of rides (millions per year) Fare (per ride)

32 Controlling Quotas How can the price received (quantity supplied) be different from the price paid (quantity demanded)? How can the price received (quantity supplied) be different from the price paid (quantity demanded)? Two transactions and thus two prices Two transactions and thus two prices 1.The transactions in taxi rides and the price at which these occur 2.The transaction of medallions and the price at which these occur

33 Controlling Quotas In every case at which the supply of goods is legally In every case at which the supply of goods is legally resticted there is a wedge A wedge between the A wedge between the demand price of the quantity transacted and the supply price of the quantity transacted This line represents the This line represents the quota rent which is the earnings that accrue to the license-holder from ownership of the right to sell the good. It is equal to the market price of the license when the license are traded

34 Quantity Controls Side Effects 1.Deadweight loss because some mutually beneficial transactions dont occur 2.Incentives for illegal activities

35 Price and Quality Controls Notes

36 Price Controls Legal restrictions on how high or low a market may go Legal restrictions on how high or low a market may go Price Ceilings is Price Ceilings is Price Floor is Price Floor is

37 Price Ceilings Typically imposed during a crisis because these events often lead to sudden price increases that hurt many people but benefit a few Typically imposed during a crisis because these events often lead to sudden price increases that hurt many people but benefit a few

38 The Market for Apartments in the Absence of Government Controls $1,400 1,300 1,200 1,100 1, Quantity of apartments (millions) Monthly rent (per apartment) D E S $1,400 1,300 1,200 1,100 1, Quantity supplied Quantity demanded Monthly rent (per apartment) Quantity of apartments (millions)

39 The Effects of a Price Ceiling $1,400 1,200 1, Quantity of apartments (millions) Monthly rent (per apartment) D S E BA Price ceiling

40 Effects of Price Ceilings Dont always cause a shortage Dont always cause a shortage If a price ceiling is set above the equilibrium price, it wont have any effect If a price ceiling is set above the equilibrium price, it wont have any effect But sometimes price ceilings can cause _________________ But sometimes price ceilings can cause _________________

41 How Price Ceilings Cause Inefficiency The effects of Rent Controls: 1.Reduces the quantity of apartments rented below the efficient level 2.Leads to misallocation of apartments among would-be renters 3.Leads to wasted time and effort as people search for apartments 4.Leads to landlords maintaining apartments in inefficiently low quality or conditions

42 How Price Ceilings Cause Inefficiency Rent controls reduce the number of apartments supplied and they reduce the number of apartment rented

43 A Price Ceiling Causes Inefficiently Low Quantity $1,400 1,200 1, Quantity of apartments (millions) Monthly rent (per apartment) D S E Price ceiling Quantity supplied with rent control Quantity supplied without rent control Deadweight Loss is

44 Deadweight Loss Key concept in economics Key concept in economics Occurs whenever an action or a policy leads to a reduction in the quantity transacted below the efficient market equilibrium quantity Occurs whenever an action or a policy leads to a reduction in the quantity transacted below the efficient market equilibrium quantity Deadweight loss is a loss to society – Deadweight loss is a loss to society –

45 Price Ceilings Causing Inefficient Allocation to Consumers 2.2 million people wanted to rent an apartment at $800 month 2.2 million people wanted to rent an apartment at $800 month Only 1.8 million apartments are available Only 1.8 million apartments are available Of the 2.2 million people, Of the 2.2 million people, An efficient allocation of apartments would reflect these differences, one who wants one urgently will get one and people who can wait will not get one BUT….this does not happen An efficient allocation of apartments would reflect these differences, one who wants one urgently will get one and people who can wait will not get one BUT….this does not happen

46 Inefficient Allocation to Consumers Instead, in an inefficient distribution of apartments, people who arent in a hurry will get one and those who are, wont. Instead, in an inefficient distribution of apartments, people who arent in a hurry will get one and those who are, wont.WHY????

47 Price Ceilings Causing Wasted Resources Price ceilings typically lead to inefficiency in of wasted resources Price ceilings typically lead to inefficiency in of wasted resources People expend money, effort, and time to cope with the shortages caused by the price ceiling People expend money, effort, and time to cope with the shortages caused by the price ceiling

48 Price Ceilings Causing Goods to be of Low Quality

49 Price Ceilings Causing Illegal Activities Price Ceilings can lead to goods being bought and sold illegally Price Ceilings can lead to goods being bought and sold illegally Black Markets are Black Markets are

50 Why are there Price Ceilings? 1.They do benefit some people 2.Buyers may not even know the goods they are using/buying have price controls 3.And (according to textbooks and economists) government officials do not understand supply and demand analysis

51 Price Floors Government intervention to push market prices up instead of down Government intervention to push market prices up instead of down

52 The Market for Butter in the Absence of Government Controls $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $ Quantity of butter (millions of pounds) Price of butter (per pound) Quantity supplied Quantity demanded Quantity of butter (millions of pounds ) $ Price of butter (per pound) D S E

53 The Effects of a Price Floor $ D S E BA Price floor Quantity of butter (millions of pounds) Price of butter (per pound)

54 Effects of a Price Floor Price floors do not always lead to an unwanted surplus Price floors do not always lead to an unwanted surplus Some price floors are irrelevant Some price floors are irrelevant If a price floor is binding (permanent) what happens to the unwanted surplus? If a price floor is binding (permanent) what happens to the unwanted surplus?

55 Price Floors Causes Low Quantity Price floors raise the price of a good to consumers Price floors raise the price of a good to consumers Price floors also reduce the quantity of that good demanded – sellers cant sell more units of a good than buyers are willing to pay Price floors also reduce the quantity of that good demanded – sellers cant sell more units of a good than buyers are willing to pay Price floors reduces the quantity of a good bought and sold below the market equilibrium quantity and leads to a deadweight loss Price floors reduces the quantity of a good bought and sold below the market equilibrium quantity and leads to a deadweight loss

56 A Price Floor Causes Inefficiently Low Quantity $ D S E Quantity demanded with price floor Quantity demanded without price floor Deadweight loss Price floor Quantity of butter (millions of pounds) Price of butter (per pound)

57 Price Floors Causes Inefficient Allocation of Sales Among Sellers Price ceilings can lead to inefficient allocation Price ceilings can lead to inefficient allocation Price floors can cause inefficient allocation of sales among sellers Price floors can cause inefficient allocation of sales among sellers

58 Price Floors Cause Wasted Resources Government purchasing of unwanted surplus of agricultural products Government purchasing of unwanted surplus of agricultural products Surplus is destroyed or it is stored and will go bad eventually Surplus is destroyed or it is stored and will go bad eventually Price floors also lead to wasted time and effort Price floors also lead to wasted time and effort

59 Price Floors Cause Inefficiency in the Quality of Goods Produced Sellers offer high-quality goods at a high price, even though buyers would prefer a low quality at a lower price Sellers offer high-quality goods at a high price, even though buyers would prefer a low quality at a lower price

60 Price Floors Cause Illegal Activity Price floors cause incentives for illegal activity Price floors cause incentives for illegal activity

61 Review: The state legislature mandates a price floor for gasoline of P f per gallon. Assess the following statements and illustrate your answer using the figure provided. The state legislature mandates a price floor for gasoline of P f per gallon. Assess the following statements and illustrate your answer using the figure provided.

62 a.Proponents of the law claim it will increase the income of gas station owners. Opponents claim it will hurt gas station owners because they will lose customers. b.Proponents claim consumers will be better off because gas stations will provide better service. Opponents claim consumers will be generally worse off because they prefer to buy gas at cheaper prices. c.Proponents claim that they are helping gas station owners without hurting anyone else. Opponents claim that consumers are hurt and will end up doing things like buying gas in a nearby state or on the black market.

63 Controlling Quantities Quantity control (quota) is an upper limit on the quantity of some good that can be bought or sold. Quantity control (quota) is an upper limit on the quantity of some good that can be bought or sold.

64 Controlling Quantities The total amount of the good than can be transacted under the quantity control is a quota limit The total amount of the good than can be transacted under the quantity control is a quota limit Controlling quantity is done though a license, an owner is given the right to supply a good Controlling quantity is done though a license, an owner is given the right to supply a good

65 The Market for Taxi Rides in the Absence of Government Controls $ D S E Quantity of rides (millions per year) Fare (per ride) $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $ Quantity of rides (millions per year) Fare (per ride) Quantity supplied Quantity demanded

66 Controlling Quotas NYC limits the quantity of taxi rides to 8 million per year NYC limits the quantity of taxi rides to 8 million per year Medallions are available to selected drivers for a total of 8 million rides Medallions are available to selected drivers for a total of 8 million rides Medallion holders can drive their own taxi or rent their medallions to others for a fee Medallion holders can drive their own taxi or rent their medallions to others for a fee

67 Effect of a Quota on the Market for Taxi Rides $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $ Quantity of rides (millions per year) Fare (per ride) Quantity supplied Quantity demanded A B $ D S E Deadweight loss The wedge Quota Quantity of rides (millions per year) Fare (per ride)

68 Controlling Quotas How can the price received (quantity supplied) be different from the price paid (quantity demanded)? How can the price received (quantity supplied) be different from the price paid (quantity demanded)? Two transactions and thus two prices Two transactions and thus two prices

69 Controlling Quotas In every case at which the supply of goods is legally In every case at which the supply of goods is legally restricted there is a wedge A wedge between the A wedge between the demand price of the quantity transacted and the supply price of the quantity transacted This line represents the This line represents the quota rent which is the earnings that accrue to the license-holder from ownership of the right to sell the good. It is equal to the market price of the license when the license are traded

70 Quantity Controls Side Effects


Download ppt "Price and Quality Controls. Price Controls Legal restrictions on how high or low a market may go Legal restrictions on how high or low a market may go."

Similar presentations


Ads by Google