1. Chapter 3
Part 5 – Price Controls

3. Learning Objectives Understand price support and ceiling
Understand Spillover benefits and supports

4. Price Controls Price floor: a minimum price set above equilibrium
Results in a surplus in the market
Price ceiling: a maximum price set below equilibrium
Results in a shortage in the market

5. Consumer and Producer Surplus
The benefit the producer receives for selling the good in the market
Generated by market prices in excess of the lowest price producers would be willing to accept for their goods
Consumer Surplus
The benefit the consumer receives by buying the good in the market
The price the individual is willing to pay more for a given product than the current market price

6. Agricultural Price Supports
Price supports for agricultural goods are an example of a price floor.
They help overcome unstable agricultural prices.
Farmers win from these supports.
Consumers and taxpayers lose from these supports.
Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

7. Reasons for Price Supports
Market Demand and Supply
Curves for Wheat
Market Demand and Supply
Schedules for Wheat S1 S0
140 b
Price
($ per tonne)
Quantity
Demanded
Quantity
Supplied
120
100 a
(D)
(S0)
(S1) 80
(millions of tonnes)
Price ($ per tonne) 60 D
$140
120
100 80 60 10 11 12 13 14 14 13 12 11 10 12 11 10 9 8 40 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quantity (millions of tonnes per year)
Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

8. Effects of Price Supports
Market Demand and Supply Curves
for Milk
Market Demand and Supply
Schedules for Milk
surplus S
1.30
Price
($ per litre)
Quantity
Demanded
(D)
Quantity
Supplied
(S)
1.10
(millions of litres)
Price ($ per litre)
.90
$1.30 59 62
A price floor
creates
a surplus. D
.70
1.10 60 60
0.90 61 58 58 60 61 62 59
Quantity
(millions of litres per year)
Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

9. Rent Controls Rent controls are an example of a price ceiling.
They keep down prices of controlled rental accommodation.
Some (especially middle-class) tenants win from these controls.
Other (especially poorer) tenants lose from these controls.
Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

10. Effects of Rent Controls
Market Demand and Supply
Curves for Units
Market Demand and Supply
Schedules for Units S
Price
($ rent per month)
Quantity
Demanded
(D)
Quantity
Supplied
(S)
700
A price ceiling
creates
a shortage.
500
(units rented per month)
Price ($ per unit)
300
$700
1700
2500
shortage
500
2000
2000 D
300
2300
1500
1500
2000
2300
2500
Quantity
(units rented per month)
Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

11. Spillover Effects
Besides intervening in markets with price controls, govt’s also play a part in dealing with the external effects of economic activity
Spillover effect: external effects of economic activity, which have an impact on outsiders who are not producing or consuming a product
Spillover Cost
Ie: Pollution, Oil Spill
If a corporation has an oil spill during their economic activity? Who is left to clean this up?
The Government!
What can the Government do to compensate this?
Introduce/Levy TAXES!

12. Spillover Costs
Spillover costs are the negative external effects of producing or consuming a product
adding these costs to private costs raises the supply curve
the preferred outcome is at a lower quantity than in a perfectly competitive market
government intervention (e.g. an excise tax) can produce the preferred outcome

13. Market Demand Curve for Strawberries Schedules for Gasoline
Spillover Costs
Market Demand Curve for Strawberries
Demand and Supply
Schedules for Gasoline D S0 S1
2.50
Spillover
Costs,
Excise
Tax
Price
($ per litre)
Quantity Demanded
Quantity Supplied a
2.00
(D)
(S0)
(S1)
(millions of litres)
1.50 b
Price ($ per litre)
$2.50
2.00
1.50
1.00
0.05 4 5 6 7 8 8 7 6 5 4 6 5 4 3 2
1.00
0.50 1 2 3 4 5 6 7 8
Millions of Litres

14. Market Demand Curve for Strawberries
2.50
Spillover
Costs,
Excise
Tax a
In this figure, when gov’t intervenes with excise taxes, supply shifts LEFT and eq shifts UP
2.00
1.50 b
Price ($ per litre)
1.00
0.50 1 2 3 4 5 6 7 8
Millions of Litres

15. Spillover Benefits
Spillover benefits are the positive external effects of producing or consuming a product
adding these benefits to private benefits raises the demand curve
the preferred outcome is at a higher quantity than occurs in a perfectly competitive market
government intervention (e.g. a consumer subsidy) can produce the preferred outcome

16. Demand and Supply Curves for an Demand and Supply Schedules
Spillover Benefits
Demand and Supply Curves for an
Education
Demand and Supply Schedules
for an Education
6000 b
Tuition
($ per year)
Enrollment Demanded
Quantity Supplied
5000
Spillover
Benefits,
Student
Subsidy
(D0)
(D1)
(S)
4000 a
(thousands of students)
$6000
5000
4000
3000
2000 8 9 10 11 12 10 11 12 13 14 12 11 10 9 8
3000
Tuition ($ per year)
2000 D1 S D0
1000 8 9 10 11 12 13 14
Thousands of Students

17. Spillover benefits - Education
Society as a whole gains from this service since it enriches the nation’s human resources
When would the government intervene and create a subsidy?
ONLY if there is a spillover benefit that is GREATER than the subsidy
By creating a bursary/subsidy, the demand for that particular degree will shift RIGHT (increase demand)

18. Review + Homework
Externalities are the costs/benefits that are not experienced directly by producers and consumers of goods
Externalities “spill over” onto third parties
Homework
page 77 question 8 and 9
Try the Worksheet