Econ Chapter 6 - Section 1 - Price Controls

What are price controls?

Government policies that set legal limits on the prices of goods or services, often because policymakers believe prices are too high or too low.

What is a price ceiling?

A legal maximum price at which a good can be sold. Example: rent-control laws

What is a price floor?

A legal minimum price at which a good can be sold. Example: minimum wage law

When is a price ceiling nonbinding?

When it is set above the equilibrium price. It has no effect on the market price or quantity sold.

When is a price ceiling binding?

When it is set below the equilibrium price, preventing the market from reaching equilibrium

What does a binding price ceiling cause?

A shortage because quantity demanded exceeds quantity supplied

What problems can a binding price ceiling create?

Long lines, wasted time, and unfair rationing when sellers favor certain buyers

What is a rationing mechanism in a free, competitive market?

The market price: anyone willing and able to pay the equilibrium price can buy the good

Why is market-price rationing considered efficient and impersonal?

It allocates goods according to willingness and ability to pay rather than sellers' personal biases

When is a price floor nonbinding?

When it is set below equilibrium price. It has no effect on market price or quantity sold

When is a price floor binding?

When it is set above equilibrium price, preventing the market from reaching equilibrium

What does a binding price floor cause?

surplus because quantity supplied exceeds quantity demanded, leaving some sellers unable to sell what they wantWhy can price controls have unintended consequences?

How can a binding price floor affect sellers?

Some sellers cannot sell all their goods, and personal biases may influence which sellers find buyers.

Why can price controls have unintended consequences?

They interfere with price signals that coordinate supply and demand, potentially creating shortages or surpluses.