ECON Chapter 6: Price Control

Price Ceiling

A maximum prices at which a good can be sold

• pc> equilibrium price= non-binding

• pc< equilibrium price= binding→ the market price is below equilibrium and the quantity supplied is lower than the quantity demanded, causing shortage

Inefficiency of price ceiling

1) cause a deadweight loss: mutually beneficial transactions don’t happen, which creates deadweight loss (lost total surplus)

2) cause people to spend resources dealing with shortage

3) inefficiently gives goods to those with lower willingness to pay while excluding those who value them more.

4) causes people to spend resources dealing with a shortage

5) causes sellers to offer low-quality goods at a low prices even through buyers would prefers a higher quality at a higher price

6) leads to black markets

Price Floor

a legal minimum on the price at which a good can be sold

• pc < equilibrium price: non-blinding

• pc> equilibrium price: binding→ the market price is forced below equilibrium, and the quantity supplied is higher than the quantity demanded, causing surplus 

A Inefficiency of price floor 

1) deadweight loss: Results in a lower quantity traded; the higher price reduces demand, causing deadweight loss.

2) Inefficient allocation of sales among sellers: sales goes to sellers who are only willing to sell at higher price 

3) wasted resources when the government buys and destroy surplus product

4) minimum wages results in fewer job available

5) causes the production of goods of inefficiently high quality 

6) Result in illegal activity