Price Controls: Ceilings and Floors AP Economics Mr. Bernstein Module 8: Price Controls: Ceilings and Floors October x, 2013

AP Economics Mr. Bernstein Price Controls A legal restriction on how high or low a market price may go Enacted by governments in response to political pressures from buyers and sellers

AP Economics Mr. Bernstein Price Ceilings Examples Resources during WWII New York City apartments (rent control) Food prices in Venezuela Salary Caps in Major League Sports Credit Card interest rate caps Where would you like to see price ceilings?

AP Economics Mr. Bernstein Modeling a $2 Price Ceiling on Tacos Qd ~= 6 Qs~= 4 Shortage = 2 Who benefits? Notice the price ceiling is below equilibrium on a graph

AP Economics Mr. Bernstein Inefficiencies of a $2 Price Ceiling on Tacos Inefficient Allocation to Consumers Some willing to pay $5 get none, some unwilling to pay $5 will be able to buy at $2 Wasted Resources Consumers spend time and other scarce resources chasing shortages (incurring opportunity costs) Lower Quality Products Black Markets

AP Economics Mr. Bernstein Why do Price Ceilings Exist? They do benefit some consumers! Those with political clout gain Once in place, there is uncertainty about removal effects Government officials may not understand supply and demand effects

AP Economics Mr. Bernstein Price Floors Examples Minimum Wage Agricultural Products

AP Economics Mr. Bernstein Modeling a Price Floor on Tacos Excess Supply Notice the price floor is above equilibrium price on a graph!

AP Economics Mr. Bernstein Inefficiencies of a Price Floor Quantity Demanded falls due to price increase Quantity bought and sold falls, creating TU loss to society Producers willing to sell at equilibrium price may not be the ones lucky enough to make sales Inefficiently high quality products Wasted Resources Producers may begin adding extravagant ingredients not even desired by buyers in market in equilibrium Illegal activity ie working below minimum wage due to surplus labor supply Encourages bribery and corruption of government officials

AP Economics Mr. Bernstein Why do Price Floors Exist? They do benefit some producers! Those with political clout gain Once in place, there is uncertainty about removal effects Government officials may not understand supply and demand effects

AP Economics Mr. Bernstein Defining Deadweight Loss “Losses associated with quantities of output that are greater than or less than the efficient level, as can result from market intervention such as taxes, or from externalities such as pollution.” Krugman

AP Economics Mr. Bernstein Defining Deadweight Loss: Price Floors

AP Economics Mr. Bernstein Defining Deadweight Loss: Price Ceilings