Chapter 5: Price Controls and Quotas

Price controls

Legal limits on how high or low a market price can go.

Price ceiling

Maximum price sellers may charge; usually below equilibrium.

Effects of price ceilings

Shortages, low quality, wasted resources, inefficient allocation, black markets.

Price floor

Minimum price buyers must pay; usually above equilibrium.

Effects of price floors

Surpluses, wasted resources, inefficiently high quality, illegal activity.

Deadweight loss

Loss in total surplus when a market fails to reach equilibrium.

Black market

Illegal market where goods sell above legal limits.

Quota

Government-imposed limit on quantity of a good sold or produced.

Quota limit

Maximum legal amount transacted under a quota.

License

Right to supply a good up to the quota limit.

Quota rent

Difference between demand and supply price at quota limit.

Wedge

Gap between demand and supply price due to a quota.

Inefficiencies caused by quotas

Missed mutually beneficial trades and illegal markets.

Q: What happens when a price ceiling is below equilibrium?

A shortage occurs.

Q: What happens when a price floor is above equilibrium?

A surplus occurs.

Q: What is the quota rent formula?

Quota rent = Demand price – Supply price.