Price ceilings and price floors

Price ceiling

maximum price sellers are allowed to charge to help consumers; below equilibrium

What a price ceiling causes

shortage- b/c the demand will be higher than supply; but market forces cannot push it back to equilibrium b/c of the ceiling

Price ceiling: inefficient allocation

consumers who really want the good do not get it, and those who care only a little do

Price ceiling: wasted resources

consumers spend extra time and money dealing with shortages

Price ceiling: inefficiently low quality

due to lower prices, suppliers offer a lower-quality product even though buyers prefer higher-quality

Price ceiling: black markets

due to shortages, goods may be exchanged illegally at a higher price

Price floor

minimum price buyers are required to pay; help producers to not drop out of the market; above equilibrium

What price floors cause

Surpluses- because people buy less at a higher price, the supply is greater than demand

Price floor: inefficient allocation

Suppliers who are willing to sell at a lower price are not able to- minimum wage

Price floor: wasted resources

the resources used to create surpluses are essentially wasted- burned, go bad, thrown away, destroyed

Price floor: inefficiently high quality

due to high prices, suppliers offer a higher quality product even though buyers prefer lower quality

Price floor: illegal activity

due to surpluses, goods may be exchanged illegally at a lower price

Quota

highest quantity of a good or service that can be supplied; usually done through licenses

Quota info

Buyers pay a higher price than the price received by the seller(seller makes money b/c buyers pay less than what the seller was willing to sell at)

Quota rent

difference in prices at quota; the earnings made from the right to sell the good

Pros of Price controls

Price ceilings help keep prices low for consumers; Price floors help suppliers make more money; quantity controls may have environmental benefits and can correct allocation problems

Cons of price controls

causes persistent shortages or surpluses; resources are not allocated efficiently; illegal activity; some controls pushed for political reasons