1. Price Controls in the Product Market
Understand how price controls affect the marketplace

2. Rent Control in NYC…
Jimmy McMillan

3. Government Intervention in the Marketplace is Always Controversial
But why is that???

4. Price Ceiling
A maximum price sellers are allowed to charge for a good or service
Government imposed restriction on the free market
Ceilings are effective below equilibrium
Creates a shortage in the housing market—or whatever market a ceiling is placed within
Quite 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 opportunities
Wasted Resources: people expend money, time, and effort to cope with shortages caused by the price ceiling…missed opportunities
Inefficiently 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 affected
Inefficiency arising from the persistent shortage
Allocation, resources, quality
Emergence of black markets
The illegal buying or selling of a good/service—either because the good is illegal or because it is illegal to sell above a certain price
Then WHY???
In theory, some people benefit: gives much cheaper housing to people that couldn’t afford their rent otherwise

7. State Minimum Prices

8. Price Floor
Minimum price buyers are required to pay for a good/service
Government restriction on the price of a good that can be charged in the marketplace
Floors are effective above equilibrium
Creates a surplus in the market of whatever good it is imposed on
Frequently, 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 equilibrium
So, both floors and ceilings reduce the quantity of goods being bought and sold
Inefficient 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 it
Wasted Resources: Wasted supply of the good produced, time, effort and energy
Inefficiently 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 goods
Illegal Activity: Creates incentive for people to behave illegally in the marketplace

10. Results of Price Floors
Persistent surplus of the good
Inefficiency arising from
Low quantity, poor allocation, waste, high quality, illegal activity
Then, 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 price
If a ceiling is above equilibrium price
Both of these scenarios would render the price control irrelevant and ineffective in the marketplace
For example: Market for cheese…