3 Government Intervention in the Marketplace is Always Controversial But why is that???
4 Price CeilingA maximum price sellers are allowed to charge for a good or serviceGovernment imposed restriction on the free marketCeilings are effective below equilibriumCreates a shortage in the housing market—or whatever market a ceiling is placed withinQuite often lead to inefficiency in the marketplace
5 Price Ceilings Creating Inefficiency Inefficient Allocation to Consumer: people who are willing and able to buy the good/service at equilibrium price don’t get it and those who care relatively little about acquiring the good/service and who are only willing to pay a lower price do get the good/service...leads to missed opportunitiesWasted Resources: people expend money, time, and effort to cope with shortages caused by the price ceiling…missed opportunitiesInefficiently Low Quality: the goods being offered under a shortage are not of the high quality that buyers are expecting from the marketplace
6 Results of Price Ceilings Persistent shortage of the good/service affectedInefficiency arising from the persistent shortageAllocation, resources, qualityEmergence of black marketsThe illegal buying or selling of a good/service—either because the good is illegal or because it is illegal to sell above a certain priceThen WHY???In theory, some people benefit: gives much cheaper housing to people that couldn’t afford their rent otherwise
8 Price FloorMinimum price buyers are required to pay for a good/serviceGovernment restriction on the price of a good that can be charged in the marketplaceFloors are effective above equilibriumCreates a surplus in the market of whatever good it is imposed onFrequently, the government will buy up the surplus
9 Price Floors Create Inefficiency Inefficiently Low Quantity: Reduced quantity demanded (surplus)—sellers cannot sell if buyers will not buy. Therefore, a price floor reduces the the quantity of a good bought and sold below market equilibriumSo, both floors and ceilings reduce the quantity of goods being bought and soldInefficient Allocation Among Sellers: Those who would be willing to sell the good at the lowest price are not always the producer who can manage to sell itWasted Resources: Wasted supply of the good produced, time, effort and energyInefficiently High Quality: The goods offered for sale in the marketplace are often high-quality and sold at a high price, although buyers would prefer low-quality, low-priced goodsIllegal Activity: Creates incentive for people to behave illegally in the marketplace
10 Results of Price Floors Persistent surplus of the goodInefficiency arising fromLow quantity, poor allocation, waste, high quality, illegal activityThen, WHY???Sellers stand to benefit from the minimums placed on the sale prices of their goods…agriculture industry in the US
11 When Floors and Ceilings are Irrelevant If a price floor is below equilibrium priceIf a ceiling is above equilibrium priceBoth of these scenarios would render the price control irrelevant and ineffective in the marketplaceFor example: Market for cheese…