Ch 5 - Price Controls and Quotas

why government controls prices

• usually for equity concerns —> think market outcome is not the FAIR outcome

• need to protect/please buyers or sellers in a market

how does government control prices

imposing price controls which are legal restrictions on how high or low a market price may go

price ceilings

• is the maximum price sellers are allowed to charge for a good/service

• government is intervening to push prices down

if the price ceiling is above the equilibrium price

the price ceiling is non-binding and has no impact on the market

if the price ceiling is below the equilibrium price

at the price ceiling the quantity demanded is a lot higher than quantity supplied causing a shortage that cant go away

inefficiently low quantity (price ceiling)

causing DWL (missed opportunites for trade)

inefficiently low quality (price ceiling)

• sellers cannot raise prices —> reduce quality/service

• no incentive to maintain quality

• ex. rent control —> poor living condtions

wasted resources (price ceiling)

• wasted resources

  • people spend money, effort, and time to cope with shortages, opportunity cost of the time spent in lines, wages not earned, leisure time not ensure

black markets (price ceiling)

• goods and services bought illegally

• encourage disrespect for the law

winners and losers with a price ceiling

• all producers are losing

• some consumers benefit from lower prices

• some consumers are worse off because they cant find goods (shortage)

price floors

• the minimum price buyers are required to pay for a good or service

• government pushing market prices up

what if the price floor is below the equilibrium price

the price floor is non-binding and has no impact on the market

what is the price floor is above the equilibrium price

the price floor is binding and quantity demanded is much higher than quantity supplied causing a surplus that cant go away (without gov. buying it)

price guarantee

the government will buy any remaining surplus

inefficient allocation of sales among producers (price floor)

• allow high cost frims to operate

• low cost sellers unable to make sales while high cost do

wasted resources (price floor)

• non-price competition

• government has to buy unwanted surpluses of agricultural products —> sometimes destroyed or thrown away

inefficiently high quality (price floor)

• sellers offer goods at ineffiently high quality

• quality is higher than buyers are willing to pay for —> would rather lower price

• not efficient —> buyers not getting what they actually wanted

winners and losers of price floors

• all consumers are losing —> paying higher price and receiving lower quantity

• some producers benefit from higher prices

• some producers lose —> unable to sell goods because of lower quantity

quota

is an upper limit on the quantity of some good that can be bought or sold —> imposed by government

quota limit

the totel amount of a good that can be legally transacted

if quota ls above equilibrium quantity

the quota is non-binding and market will follow the Eq

if quota is below equilibrium quantity

• binding —> producers worse off, some producers better off

• causes DWL

quota rent per good

• the difference between the demand and supply price at the quota limit