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

2. 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

3. 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?

4. 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

5. 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

6. 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

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

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

9. 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

10. 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

11. 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

12. AP Economics Mr. Bernstein
Defining Deadweight Loss: Price Floors

13. AP Economics Mr. Bernstein
Defining Deadweight Loss: Price Ceilings