Lesson 5: Price Controls

Direction of Causation

The relationship between cause and effect in economic situations, indicating how one variable influences another.

Price Control Law

A law that mandates what price buyers and sellers must trade at.

Effective Price Control

A price control law that keeps the price above or below the market-clearing price.

Maximum Price Control (Price Ceiling)

A law that prohibits people from trading at a price above a legal maximum.

Minimum Price Control Law (Price Floor)

A law that prohibits people from trading at a price below a legal minimum.

Cost-Benefit of Max Price Control Laws

• Create a shortage

• Benefit some consumers and harm others

• Harm all producers

• Do more harm than good

Cost-Benefit of Minimum Price Control Laws

• Create a surplus

• Benefit some producers and harm others

• Harm all consumers

• Do more harm than good

Rent Control Law

A maximum price control on rental housing.

Effects of Rent Control

• Housing shortage

• Ruined buildings

• Lawbreaking

• Misallocation of Housing

• Bias Against Low-Income Housing

• Lowers the Cost of Discrimination by landlords

Rationing Laws

laws that restrict people’s consumption of certain goods.

Price Gouging

Charging a price that is “too high.”

Price Gouging Laws (or Anti-Price Gouging Laws)

Maximum price control laws imposed on necessities during an emergency, typically set at the pre-emergency price.

Minimum Wage Law

A minimum price control on workers’ wages.

Wage

a price of labor

What leads to higher wages?

Higher Productivity

Unemployment Rate

The percentage of the population that is actively looking for work but has no job.

Effects of minimum wage laws

– Reduced hours

– Reduced benefits and training

– The elimination of entire job categories

– Workers leaving the labor force