Professional Documents
Culture Documents
Price Floors and Ceilings
Price Floors and Ceilings
Price Floors and Ceilings
S
P P
Quantity Quantity
1
ECONOMICS Chapter 4 1
Review: Supply and Demand
S
P
Peq
Qeq Quantity
2
ECONOMICS Chapter 4 2
What we will learn in this chapter
• ➤ The meaning of price controls and quantity controls,
two kinds of government intervention in markets
• ➤ How price and quantity controls create problems and
make a market inefficient
• ➤ Why economists are often deeply skeptical of attempts
to intervene in markets
• ➤ Who benefits and who loses from market interventions,
and why they are used despite their well- known problems
• ➤ What an excise tax is and why its effect is similar to a
quantity control
• ➤ Why the deadweight loss of a tax means that its true
cost is more than the amount of tax revenue collected
3
ECONOMICS Chapter 4 3
Price controls
5
ECONOMICS Chapter 4 5
Price controls: price ceilings
S Price D S
Price D
4 4
3 3
Price
Ceiling
2 2
Shortage
6
ECONOMICS Chapter 4 6
Price controls: Price Celings in Apartments
7
ECONOMICS Chapter 4 7
Price controls: price ceilings
8
ECONOMICS Chapter 4 8
Price controls: price ceilings
9
ECONOMICS Chapter 4 9
Price controls: price ceilings
10
ECONOMICS Chapter 4 10
Price controls: price ceilings
Wasted Resources
• Price ceilings typically lead to inefficiency in the form of
wasted resources: people spend money, time and
expend effort in order to deal with the shortages caused
by the price ceiling.
• You waste a lot of time looking for a good (e.g. an
appartment) in case of shortage, the time has it’s value!
You can work or just rest, do something better than look
for a good you’ can’t find.
11
ECONOMICS Chapter 4 11
Price controls: price ceilings
12
ECONOMICS Chapter 4 12
Price controls: price ceilings
Black Markets
• A black market is a market in which goods or
services are bought and sold illegally—either
because it is illegal to sell them at all or because
the prices charged are legally prohibited by a
price ceiling.
• If someone for example bribes (gives extra
money) to the apartment owners he will get the
apartment, but the honest people that don’t
break the law will never find one this way!
13
ECONOMICS Chapter 4 13
Price controls: price floors
14
ECONOMICS Chapter 4 14
Price controls: price floors
Surplus
Price D S Price D S
4 4
3 3
Price
2 Ceiling
2
15
ECONOMICS Chapter 4 15
16
ECONOMICS Chapter 4 16
Price controls: price floors
Why a Price Floor Causes Inefficiency
• Inefficient Allocation of Sales Among Sellers
Price floors lead to inefficient allocation of sales
among sellers: those who would be willing to sell the
good at the lowest price are not always those who
actually manage to sell it. Example: Farm Subsidies
• Wasted Resources
Like a price ceiling, a price floor generates inefficiency
by wasting resources.
17
ECONOMICS Chapter 4 17
Subsidies
18
ECONOMICS Chapter 4 18
Price controls: price floors
19
ECONOMICS Chapter 4 19