PRICE CONTROLS: PRICE CEILINGS, PRICE FLOORS, AND TAXES

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.

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

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.

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

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

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 u Some units still under rent control today u Many rich tenants in rich neighborhoods paying low WWII prices.

Min wage laws do not affect highly skilled workers. They do affect teen workers and those with the fewest skills. The Minimum Wage W L D S $4 Min. wage $ unemployment

TAXES The government levies taxes on many goods & services to raise revenue to pay for national defense, public schools, etc. The government can make buyers or sellers pay the tax. The tax can be a % of the goods price, or a specific amount for each unit sold.

The Incidence of a Tax: how the burden of a tax is shared among market participants 450 S1S1 P Q D1D1 $ D2D2 $11.00 P B = $9.50 P S = Tax In our example, buyers pay $1.00 more, sellers get $0.50 less.