U2 M8 Price Ceiling

The Rationing Function of Prices

• rationing: dividing something out

  • ex. you don’t have an infinite amount of money, u need to ration ur money to buy a lambo

• If we didn’t have scarcity, no need for rationing

• Once scarcity arises, there has to be a way to ration available resources, goods, or services

• Price system is 1 form of rationing

Methods or non-price rationing

• queues, random assignments, coupons

  • ex. Mr. Mordkoff gives only half of his class a certain assignment at a time

  • colleges: money has to be rationed (can’t afford it), acceptance method(some will get out some won’t → that’s a non-price form of rationing)

Price Controls

• legal restrictions on how high or low a market price can go

• Price Ceilings and Price Floors

Price Ceiling

• a policy that puts a maximum price on an item. This hinders the rationing function of prices.

• If set below the market clearing level, a prolonged shortage will result.

• If the price ceiling is above the equilibrium price, nothing will change (in the short run) because equilibrium is the best price

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Why Price Ceilings?

• To protect lower income citizens from not being able to purchase or obtain certain goods or services (I.e. rent control)

• To necessities, to protect consumers from exorbitant, unethical, high prices, that could be set by producers (ie - electricity, water, etc.)

Effects of Price Ceiling

• Shortages

• Inefficient allocation to consumers:

  • if you were willing to pay at equilibrium before the price ceiling, now you might not be able to buy your gasoline because of the shortage

• Wasted Resources

  • waste time looking over for a good because of the shortage

• Inefficiently low quality:

  • no incentive to try hard because they can’t get a higher profit margin (they’ll skimp out on other things)

• Black Markets

  • selling goods illegally