1. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price Ceilings ECON 130(3) September 14-16, 2009 Sumner La Croix

2. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Supply, Demand, and Government Policies u In a unregulated market system with open entry and exit, market forces establish equilibrium prices and quantities. u While equilibrium conditions may be efficient, not everyone will be satisfied with the outcomes. Consumers Producers

3. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price Controls... u Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. u Result in government-created price ceilings or price floors.

4. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price Ceilings & Price Floors Price Ceiling u A legally established maximum price at which a good can be sold. Price Floor u A legally established minimum price at which a good can be sold.

5. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price Ceilings Two outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is binding if set below the equilibrium price, leading to a shortage.

6. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Price Ceiling That Is Not Binding $3 Quantity of Oranges lbs 0 Price of Oranges-lb 4 Demand Supply Equilibrium price Price ceiling 100 Equilibrium Quantity Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

7. A Price Ceiling That Is Binding $3 Quantity of Oranges-lbs 0 Price of Oranges-lb 2 Demand Supply Equilibrium price Price ceiling Shortage 125 Quantity demanded 75 Quantity supplied Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

8. Effects of Price Ceilings A binding price ceiling creates… shortages because Q D > Q S u Gasoline shortage of the 1970s nonprice rationing u Long lines u Discrimination by sellers

9. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Rationing Resources u Price Rationing Efficient Impersonal u Non-price Rationing Long lines Waste buyers time Inefficient Discrimination by sellers: Goods may not go to buyer who value it most highly Inefficient Potentially unfair

10. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Lines at the Gas Pump In 1973, OPEC raised the price of crude oil in world markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. What was responsible for the long gas lines? Economists blame government regulations that limited the price oil companies could charge for gasoline.

11. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Initially … Price ceiling Demand Supply Price of Gasoline Quantity ofGasoline 1. The price ceiling is not binding... P1P1 Q1Q1

12. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Then … Price ceiling Demand S1S1 Price of Gasoline Quantity ofGasoline S2S2 2. supply falls... P2P2 QSQS QDQD P1P1 Q1Q1 3.... the price ceiling becomes binding... 4.... resulting in a shortage.

13. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Rent Control u Rent controls are ceilings placed on the rents that landlords may charge tenants u Goal: to help the poor by making housing more affordable u New York City rent controls were enacted as a WWII emergency measure uSome units still under rent control today uMany rich tenants in rich neighborhoods paying low WWII prices.

14. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Rent Control in the Short Run... Quantity of Apartments 0 Rental Price of Apartment Demand Supply Controlled rent Shortage Supply and demand for apartments are relatively inelastic

15. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Rent Control in the Long Run... Quantity of Apartments 0 Rental Price of Apartment Demand Supply Controlled rent Shortage Because the supply and demand for apartments are more elastic... …rent control causes a large shortage

16. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Effects of Rent Control u Discrimination against any groups who are less favored by landlords. u Bribery by potential tenants. u Key money charged??? u Unbundling of services.??? u Less maintenance or remodeling. u Age of appliances.