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Price Controls in the Product Market

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Presentation on theme: "Price Controls in the Product Market"— Presentation transcript:

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…

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