price floors and ceilings

Price ceilings

A form of price control where government sets a highest possible price that can be charged for a good, set below equilibrium price

Reasons government imposes price ceilings

Aim to ensure certain basic goods and services are affordable, specially to low-income consumers

Situation that price ceilings are mostly seen in

Anti-gouging laws, hyperinflation, rent control

Consequences of rent control

Housing is more affordable, decrease the prevalence of homelessness, less gentrification, create a shortage in the housing market, this gives rise to non-price rationing mechanism, can lead to the emergence of parallel markets, quality of housing will lower

Welfare effects of price ceilings on consumers

Some tenants are better off as they can find lower price housing, some are worse off due tot the shortage

Welfare effects of price ceilings on producers

Producer surplus shrinks

Welfare effects of price ceilings on social surplus

There is welfare loss, but there may also be allocative efficiency

Imposing a price ceiling on basic goods

They willl be more affordable, but thye will have to be rationed based on: "first come, first served", firms may decide themselves, random allocation by ballot, government may ration, illegal markets may develop, quality may worsen

Price floors

A form of price control that government can impose is they deem market-price to be too low. These are set above equilibrium price

Reasons a government imposes price floors (for agricultural goods)

Fluctuations in price may be a problem as farmers incomes will also fluctuate, the agricultural sector s share of national income may be decreasing, it may protect employment in rural areas

Surplus that the government buys as a result of price floors

Store the surplus and release it later on (costly), destroy the surplus (wasteful), sell the surplus abroad (bad for local sellers)

Impact on stakeholders, producers (price floors)

Producer revenue rises and their incomes are stabilized. The producer surplus rises

Impact on stakeholders, consumers (price floors)

Consumers pay more and enjoy less of the good, consumer surplus decreases

Impact on stakeholders, government (price floors)

Forced to spend heavily to purchase surplus, there is opportunity cost

Impact on stakeholders, society (price floors)

There is welfare loss

Price floors in the labor market

Guarantee income to unskilled workers, more unemployment (only sometimes), also demand may rise as a result of workers having more incom