Price Ceilings and Floors

Why would governments attempt to control prices?

Moral or political cases from buyers (ex. Rent control), or moral/political cases from buyers (ex. Raise minimum wage)

When is a price ceiling binding?

when it is below the equilibrium price

When is a price ceiling non-binding?

when it is above the equilibrium price

How can price ceilings cause inefficiencies in competitive markets?

When a price ceiling is binding, it prevents the market forces from adjusting the upwards until price until demand=supply

Deadweight Loss (DWL)

A measure in $ of the total surplus lost by the market when a price control is imposed.

Negative consequences of price ceilings

Costs that result from addressing shortages, lower quality, shadow markets.

How can price floors create inefficiencies in competitive markets?

If a price floor is binding, it prevents the market forces from adjusting the price downwards until demand=supply

Negative Consequences of price floors

Costs that result from addressing surpluses, shadow markets, inefficiently high quality