Exam 2 Ch 8-12

price ceiling

when the maximum price that can be legally changed is below the market price

effects of price ceiling

• shortages

• reudctions in product quality

• wasteful lines and other search costs

• loss of gains from trade

• misallocation of resources

shortages

when prices held below market price the quantity demanded exceeds quantity supplied

measured by difference between quantity demadned at controlled price and quantity supplied at controlled price

with price ceilings demanders can

NOT signal their need to suppliers nor cna they provide suppliers wiht incentive to produce more

reductions in quality

at controlled price sellers find that there is an excess of demand/sellers have more customers than they have goods

in order to inverse prpofits when price controlled supppliers decline quality of good

so when prices held below market levels quality declines

quality can also fall by reductions in service

normally sellers have incentive to please customers, but when prices are held below market levels, sellers have more customers than wanted/needed

wasteful and other search cost

corruption and bribes can be common, especially when price controls are long lasting

buyer will compete to avoid being left wiht nothing

price contorls do not eliminate competition

they change the form of competition

lost gains from trade (deadweight loss)

buyers and sellers want to trade but prevented from doing so by threat of jail

price contorl prevetns mutually profitable gains from trade from being exploited

misallocation of resources

price controls distort singals and climate incentives

no signal and no incentive to ship oil where needed most (misallocated)

price controls cause reousrces to be misallocated

geographically and across different uses becuase wihtout market prices no gurantee good flow to its highest value uses

shortages in one market create

breakdowns and shortages in other markets

chaos of price controls expand into market with out it

rent control

price ceiling on rental housing such as apartments

prohibits landords from raising rent

short run supply curve for rent controls

for apartments inelastic because apartments are long lasting goods that cannot be moved so when rent controlled owners have few options

long run supply curve for rent controls

for apartments elastic because shortage grows overtime short run short run shortage to long run shortage (not building new units)

rent controls cause

reduction in quality because price forced down so owners stave off losses by cutting costs

“Rent control is the most effective method we know for destroying a city”

at a controlled price landlords have more customers then they have apartments

so pick and chose who to rent to

DISCRIMINATE → when the price of discrimination falls, the quantity of discrimint5ion demanded will increase

under rent control demanders are willing to

pay for more for an apartment than sellers would require to rent apartment

rent regulations

limits price increases without limiting prices

arguments for price ceilings

best case for price control is the discipline monopolies

command economy

economy with permanent/universal price controls

shortages are beneficial to

very elite who control prices

the more blat one has the more access to things/services that are scarce

price floor

when minimum price that can be legally changed is above the market price

government intervention to keep prices above market levels

price floor effects

• surpluses

• lost gains from trade (deadweight loss)

• wasteful increases in quantity

• misallocation of resources

minimum wage example

the more employers have to pay for low-skilled workers they will higher (unemployment)