Chapter 6- price controls, price ceilings and floors

Price ceiling definition

A legal maximum on the price at which a good can be sold

If price cap is below equilibrium it is

Binding

It lowers Q^s and increases Q^d

Shortage–lasting because market cannot adjust

Who gets the goods in a shortage?

1. Long lines- the first people to get there

2. Favoritism- connections

3. Govt. could ration it- tries to make it fair (set amount of coupons to buy)

4. Black market

None of these are very efficient, but often with P_c

If price cap is above equilibrium it is

Non-binding

Wont affect anything

When do price controls happen

When the govt. does not like the price

Price floors protect…

Sellers and not buyer

When do price floors happen?

When govt. thinks price is too low

Definition of price floor

The legal minimum at which a good can be sold

What happens when price floor is above equilibrium

Binding

Less Q^d more Q^s

Surplus

If a price floor creates a surplus govt.s will typically

Buy the surplus

Shift supply curve to left by paying sellers to not produce

Shift demand right by urging consumers to buy

Price floors can be inefficient because…

to raise the price and give money to farmers costs the govt. a lot of $