price ceiling and price floors

price ceiling

max set price that can be charged

binding price ceiling

under the equilibrium (ceiling)

non-binding price ceiling

over the equilibrium

no effect on price or quantity sold

(ceiling)

shortage

prices below the market price cause

quantity demanded =/ quantity supplied

reduction in product quality

shortage + excess of demand => more customers than goods

therefore raise profits by decreasing quality (cost of inputs)

wasteful lines and other search costs

first come first serve, paying in time, change the form of competition

lost gains from trade

DWL

buyers willing to pay less for additional gallon

sellers willing to sell more for additional gallon

misallocation of resources (price ceiling)

price control distorts signals and eliminates incentives

no guarantee that good goes to highest valued uses (first come first serve)

blat

shortages benefit party elite who control prices, they use rank and privilege to get services

price ceiling

misallocation of resources, lost gains from trade, reduction in product quantity, wasteful lines and other search costs, shortages

price floor

min set price

binding price floor

set over the equilibrium (floor)

nonbonding price floor

set under the equilibrium

no effect on price or quantity sold

(floor)

surplus

quantity supplied > quantity demanded

lost gains from trade

DWL

wasteful increases in quality

price floor mask it illegal to compete for more customers by lowering prices → attract customers by increasing quality

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misallocation of resources (price floor)

increased costs and reduced innovation

price floor

surplus, misallocation of resources, wasteful increase in quality, lost gains from trade

long run

shortages created by price ceiling are bigger in the ____