Chapter 4: Price Controls and Quotas: Meddling with Markets

Price Controls

Legal restrictions on how high or low a market price may go.

Quantity Controls (Quotas)

Limits on the amount of a good that can be bought or sold.

Why do Governments Intervene?

• Market prices do not always satisfy buyers or sellers, leading them to lobby the government for intervention.

• Either the equilibrium price is considered too high (e.g., rent) or too low (e.g., wages).

• However, market interference has consequences, often creating inefficiencies and unintended side effects.

Price Ceiling

A maximum price sellers are allowed to charge for a good or service, typically set below equilibrium.

Consequences of Price Ceilings

Can lead to shortages, inefficient allocation, wasted resources, declining quality, black markets, and deadweight loss.

Deadweight loss

The loss of economic efficiency that occurs when the equilibrium output is not achieved, often due to price controls or quotas.

Example of Price Ceilings

• Example: Venezuela's Food Shortages

  • Price controls intended to help consumers led to severe shortages.

  • Gas stations imposed purchase limits of 10 gallons, leading to long lines and wasted time.

Price Floor

A minimum price buyers are required to pay, usually set above equilibrium.

Consequences of Price Floors

Can create surpluses, inefficient allocation, wasted resources, high quality, black markets, and deadweight loss.

Binding price floors

• Binding price floors: When set above equilibrium, they create surpluses (quantity supplied > quantity demanded).

  • Example: The butter market – Demand falls to 9 million pounds, supply rises to 12 million, leading to a 3-million-pound surplus.

Quota

An upper limit on the quantity of a good that can be bought or sold.

When is a quota used?

• Often used to control supply, stabilize prices, or protect certain industries.

• However, quotas also create inefficiencies, limiting market growth and distorting supply-demand balance.

Consequences of Market Intervention

Often leads to shortages, surpluses, inefficiencies, and black markets.

Why do Price Controls and Quotas Exist?

Political Influence: Some groups benefit from controls (e.g., renters, farmers) and are more vocal than those harmed.

Lack of Awareness: Consumers may not realize what would happen without price controls.

Government Misunderstanding: Policymakers may not fully grasp supply and demand dynamics.

Political Influence in Market Controls

Some groups benefit from price controls and advocate for them while others are not well represented.

Unintended Consequences of Price Controls

Include market inefficiencies, such as declining quality of goods and distortion of supply and demand balance.

Examples of Price Controls

Rent control in NYC, minimum wage laws, and agricultural price supports.