Price controls: Government-imposed limits on prices in the market.
Price Ceilings: Limits the maximum price that can be charged for a good or service.
Price Floors: Sets a minimum price that can be charged.
Purpose: Generally to help consumers by making goods more affordable.
Example: Rent control in cities like New York and San Francisco.
Economic Impact: Economists often argue against such controls.
Can create a non-binding ceiling if set above equilibrium price (e.g., price set above $800 when equilibrium is $800).
Effects: No visible impact, as market prices remain the same.
A binding price ceiling occurs when set below equilibrium (e.g., $500).
Consequence: Causes shortages, as demand exceeds supply. More buyers want apartments than there are available.
Shortages worsen over time due to increasing demand and limited supply.
Effect on Market Dynamics:
Results in unfair allocation of apartments (who gets them based on other criteria, not ability to pay).
Creates informal markets or alternative means of getting housing (e.g., connections, luck).
Purpose: To ensure that sellers can earn a minimum profit.
Example: Minimum wage laws that indicate the lowest permissible wage an employer can pay.
A non-binding price floor is set below equilibrium (e.g., $7 when equilibrium is $10).
Effects: No impact on the market as it does not alter prices or quantity.
A binding price floor occurs when set above equilibrium (e.g., $10 or higher).
Consequence: Creates a surplus of goods in the market (e.g., more people wanting jobs than employers willing to hire).
Results in higher unemployment, especially for low-skilled workers (e.g., teenagers).
Current U.S. federal minimum wage: $7.25; some states set higher.
Higher minimum wages can cause:
Decreased employment for low-wage workers (employers hire less).
Potential long-term impacts on education and job training availability.
Overshadowing concerns from proponents who advocate it as a solution to poverty.
Trade-offs involved in setting minimum wage:
Can lead to higher dropout rates from high school if youth cannot find entry-level jobs.
Often seen as beneficial for families when making ends meet but can distort job availability.
Economists generally favor free markets and argue that price controls can lead to adverse market outcomes:
Distort supply and demand balance.
Discourage production of the good (e.g., fewer apartments if rent is controlled).
Encourage inefficient allocation of resources based on non-price factors.
Alternative solutions suggested:
Rent or wage subsidies rather than direct price controls to assist those in need.
Governments impose taxes to generate revenue, impacting market dynamics.
Tax incidence refers to how the burden of tax is divided between buyers and sellers.
Taxes shifts the demand or supply curve:
e.g., a tax on buyers raises the effective price they pay.
Results in reduced quantities sold and potentially higher prices paid by buyers.
Tax incidence is based on elasticity of supply and demand:
More elastic demand means consumers can respond to price changes more easily.
More inelastic supply means producers cannot change quantity produced without significant loss.
Regardless of whether the tax is levied on buyers or sellers, the end effect on the total price and quantity will be similar:
Total tax burden may shift towards the party that is more price sensitive (elastic side pays less).
Governments often target luxury items for higher taxes, but such markets can be surprisingly elastic.
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