Price Controls Chapter 6, Lesson Three

Social Goals vs. Market Efficiency In our market economy, we allow supply and demand, and the price system, to help make decisions and allocate resources We leave the market alone and give supply and demand the freedom to move in order to find the equilibrium price. This is mostly an economic goal. However, we have many social goals as well.

Social Goals vs. Market Efficiency Freedom Efficiency Full employment Price stability Economic growth

Social Goals vs. Market Efficiency What happens when the market economy and price system are allowed to move freely, but one of our social goals is compromised because of this? Sometimes, in order to reach these social goals, prices must be set at “socially desirable” levels. This is called a price control.

Price Controls A price control is when the government or some outside force sets the market price at a level other than market equilibrium. What things can you think of in our society that have set prices? These prices aren’t allowed to move, even if supply and demand shift?

Price Ceiling A price ceiling is a type of government regulation (and a type of price control) that prevents prices from rising above a certain level. Price ceilings can lead to shortages. Just like you can’t go above the ceiling in a room, you can’t go over the price ceiling—even though the equilibrium price is higher than the set ceiling price.

Price Ceiling Price ceilings cause shortages because at the set price (below equilibrium) Qd > Qs. Can you think of any examples of price ceilings? In New York City, certain apartment buildings are not allowed to charge above a set price for rent. This is called a rent control and it is a type of price ceiling.

Price Ceiling

Price Floors A price floor is another type of government regulation (and price control) that prevents prices from falling below a certain level. Price floors cause surpluses. A price floor acts like a floor in a room—it’s the lowest point you can go—even if you want to go further, you still can’t go below the floor. Even if the equilibrium price wants to be lower, it’s not allowed to go below the price floor.

Price Floors

Price Floors Price floors cause surpluses because Qs>Qd Can you think of any examples of price floors in our market economy today? Minimum wage is a type of price floor because employers are legally required to pay a minimum (or floor) wage. There are more suppliers of labor than there is a demand for labor at the minimum wage.

Price Supports Price supports—a type of price floor where the government subsidizes an industry to help the market. Most common price support is agricultural price supports. Government and farmers work together to set a target price. The farmer then sells crops on the open market at market price. The government subsidizes (or pays the difference) the farmer for what the farmer should have gotten (according to the target price).

Price Freeze Price freeze—a government restriction placed on a product that will keep prices from increasing This is usually done in times of emergency or tragedy to keep people from price gouging. Price gouging—taking advantage of an emergency situation for profit.

Price Freeze Can you think of a time when the government has put limits on the prices of certain items to keep people from profiting during an emergency? Hurricane evacuation and aftermath 9/11, there was a price freeze put on car rentals when all the airplanes were grounded