oar setzouar en 78D Price Ceilings ‘Laws that government enacts to regulate prices are called Price controls. Price controls come in two flavors. A price ceiling keeps a price from rising above a certain level (the ceiling”), while a price floor keeps a price {rom falling below a certain level (he “floot”). This section uses the demand and supply framework to anslyze price ceilings. The next sestion discusses price floors. ‘In many markets for goods and services, demanders outnumber suppliers. Consumers, who are also potential voters, sometimes unite behind a political proposal to hold down a certain price. In some cities, such as Albany, enters have pressed political leaders to pass rent control laws, a price ceiling that usually works by stating that rents can be raised by only a certain maximum percentage each year, Rent control becomes a politically hot topie when rents begin to rise rapidly. Everyone needs an affordable place to ive. Perhaps a change in tastes makes a certain suburb or town @ more popular place to live, Perhaps Jocaly-based businesses expand, bringing higher incomes and more people into tne area. Changes ofthis sort can cause change inthe demand for rental housing, as Figure [ illustrates. The original equilibrium (E) les atthe intersection of supply curve Sand demand curve Dy, corresponding to an equilibrium price of $500 and an equilibrium quantity of 15,000 units of rental housing. The effect of greater income or a change in tastes is to shift the demand curve for rental housing othe right, as shown by the data in Table 10 andthe shif from Dp {oD on the graph. In this market, atthe new equilibrium Fy, the price ofa rental unit would sev $600 and te equilibrium quantity would increas 0 17,000 units Excess demand or shortage fram pee cans Price (oars io monthly ent) 40 1412 19 14 1516 47 18 192024 222324 ‘Quantity (thousands of ental unite) igure 1.4 Price Ceiling Example—Rent Control. The ‘original intersection of demand and supply occurs at Ef demand shifts from Dy fo Dy, the new equilibrium would be ‘ar E;—unless price ceiling prevents the price from rising. the price not permite to ris, the quant: supplied ‘aman at 15,000, However, afer the change in demand, the ‘quantity demanded rises to 19,000, resulting ina shortage Pie ce mt Sele Onl Genet No ety Dene dio ‘ico 23,000238m Sotz6uar - FT Figure 1, A Price Ceiling Example—Rent Control. The original intersection of demand and supply occurs at Ey. If demand shifis from Dy fo Dy, the new equilibrium would be «a E;~unless price ceiling prevents the price from rising. the price snot pormited to rise, the quantity supplied ‘remains at 15,00. However, afer the change in demand, the ‘quantity demanded rises to 19,000, resulting ina shortage Price 1 Quantity Supplied Original Quantity Demanded New Quantity Demanded sao 18,000 23,000 3500 15,000 19,000 600 13,000 17,000 700 1,000 1,000 3800 20,000 10,000 14,000 ‘Table 10, Rent Control Suppose that arent contol law is passed to keep the price atthe original equilibrium of $500 for a typical apartment. In EigueL, the horizontal line atthe price of $500 shows the legally fixed maximum price set by the rent contol law. However, the underlying forces that shifted the demand curve tothe right are sil here. At that price ($500), the quantity supplied remains atthe same 15,000 rental units, but the quantity demanded is 19,000 rental units. In other words the quantity demanded exceeds the quantity supplied, other isa shortage of ental housing. One ofthe ironies of price ceilings is that while the price eeiling was intended help renters, there are actually fewer apartments rented out under the price ceiling (15,000 rental units) than would bre the ease a the market rent of $600 (17,000 rental units). Price ceilings do not simply benefit renters atthe expense of landlords. Rather, some renters (or potential renters) lose their housing as landlords convert apartments to co-ops and condos. Even when the housing ‘remains in the rental marke, landlords tend to spend less on maintenance and on essentials like heating, cooling, hot wate, and lighting. The first rule of economies is you do not get something for nothing — ‘everything has an opportunity cost. So if renters get “cheaper” housing than the market requires, they tend to also end up with lower quality housing, Price ceilings have been proposed for other products. For example, price ceilings to limit what producers can charge have ben proposed in ecent years for prescription drugs, doctor and hospital fees, the charges made by some automatic eller bank machines, and auto insurance rates, Price ceilings are enacted in an attempt 1 keep Prices low for those who demand the product But when the market price isnot allowed tris tothe suilibrium level, quantity demanded exceeds quantity supplied, and thus a shorlage occurs. Those who ‘manage to purchase the product at the lower price given by the price cling will benefit, but sellers ofthe product will suffer, along: those who are not able to purchase the product at all. Quality is also likely to. deseriorate, °e238m satz6.ar - = 788 Price Floors ‘A price floors the lowest legal price that can be pad in markets for goods ancl services, labor, or financial capital Perhaps the best-known example of a price loot isthe minimum wage, which is based on the ‘normative view that someone working full ime ought to be able to afford a basic standard of living, The federal minimum wage atthe end of 2014 was $7.25 per hour, which yields an income for a single person slightly higher than the poverty lin, As the cost of living rises over time, the Congress periodically raises the Federal minimum wage. Price floors are sometimes called “price supports,” because they support a price by preventing it from falling below a certain level. Around the world, many countries have passed laws to create agricultural price supports. ‘Farm prices and thus farm incomes fluctuate, sometimes widely. So even if, on average, farm incomes are ‘adequate, some years they can be quite low. The purpose of price supports is o prevent these swings. ‘The most common way price supports work is that the government enters the market and buys up the product, adding to demand to keep prices higher than they otherwise would be. According to the Common Agricultural Policy reform passed in 2013, the European Union (EU) will spend about 60 billion euros per ysar, or 67 billion dolar per year, or roughly 38% ofthe EU budget, on price supports for Europe's Farmers from 2014 to 2020. Bi ure illustrates the effects of a government program that assures a price above the equilibrium by focusing ‘on the market for wheat in Europe. In the absence of government intervention, the price would adjust so that the quantity supplied would equal the quantity demanded atthe equilibrium point Ep, with price Py and ‘quantity Qo, However, policies to keep prices high for farmers keeps the price above what would have been the ‘market equilibrium level—the price PF shown by the dashed horizontal line inthe diagram. The result is a demanded (Qd), When quantity supplied exceeds quantity {quantity supplied in excess of the qua demanded, a surplus exists. ‘The high-income areas ofthe world, including the United States, Europe, and Japan, are estimated to spend ‘oughly SI billion per day in supporting their farmers Ifthe government is willing to purchase the excess supply (orto provide payments for others to purchase it), then farmers will benefit from the price floor, but taxpayers and consumers of food will pay the costs. Numerous proposals have been offered for reducing farm subsidies. In many countries, however, political support for subsidies for farmers remains strong. Either ‘because this is viewed by the population as supporting the traditional rural way of life or because ofthe lobbying power of the agro-business industry For more detail on the effects price ceilings and floors have on demand and supply, see the following Clear It Up featureFr lobbying power ofthe agro-business industry. For more dtl onthe effets price ceilings and lors have on demand and supply, se the following Clea It Up feature, eg Fleer 2. European Whea Price: d Price Floor Example The rset of demand (D) and supply) woul be at the equities ptt Ey Hever erie floor et at ashe rice abun E and preven from fling. The eso the pice flrs th the quant supplied Os ‘reeds he quant demanded Qe There ees supp h (tao called eeuples, Doptee cans ara fers change ema x so? Neither price ceilings nor price hors cause demand or supply to change. They simply set a price ‘hat limits what canbe Ipally charge inthe market. Remember, changes in price do not cause demand or supply to change. Prce ceilings and price Boos can cause a diffrent choice of quantity demanded slong a demand curve, but they do not move the demand curve, Price contol can cause diferent choice of quantity suppliod along supply curve, but they donot shift the supply curve Key Concepts and Summary Price ceilings prevent pice fom rising above ace lng is set below the ‘cquilieium price, quantity demanded wil exceed quantity supplied, and excess demand or shortages will result Price lors prevent price om filling below a era level. When a price lori set above the ‘uilibrium price, quantity supplied will excced quamity demanded, and excess supply or surpluses wil result Price floors and price clings often lead to unintended consequences 1._What isthe effect of price ceiling on the gy demanded ofthe product? 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