Price Controls

Price controls: Government-imposed legal restrictions on prices.
Policymakers implement price controls when they believe market prices are unfair to buyers or sellers, which can often generate inequities.
In contrast, taxes are used by governments to raise revenue for public purposes or to influence market outcomes rather than directly control prices.

Price Ceiling: A legal maximum on the price at which a good or service can be sold.
- Examples: Rent-control laws.
Price Floor: A legal minimum on the price at which a good or service can be sold.
- Examples: Minimum wage laws.

Not binding: If the price ceiling is set above the equilibrium price.
- It has no effect on the market price or quantity sold.
- The market can still reach its natural equilibrium where supply equals demand.
Binding constraint: If the price ceiling is set below the equilibrium price.
- It becomes a binding constraint.
- Causes a shortage: Quantity demanded exceeds quantity supplied.
- Sellers are forced to ration the scarce goods among buyers.

Panel (a): Price ceiling of 4$. Equilibrium price is 3$. Since 4 > $3, the ceiling is not binding. The market price remains at 3$, and 100$ cones are demanded and supplied.
Panel (b): Price ceiling of 2$. Equilibrium price is 3$. Since 2 < $3, the ceiling is binding. The market price becomes 2$. At this price, 125$ cones are demanded, but only 75$ are supplied, resulting in a shortage of 125 - 75 = 50$$ cones.

Cause: The Organization of the Petroleum Exporting Countries (OPEC) significantly raised the price of crude oil, which reduced the supply of gasoline.
Immediate Effect: This reduction in supply, coupled with U.S. government regulations that had imposed a price ceiling on gasoline, led to long lines at gas stations.
Pre-OPEC situation: Before the price hike, the equilibrium price for gasoline was below the price ceiling, so the ceiling had no effect.
Post-OPEC situation: When the supply decreased, the new equilibrium price rose above the existing price ceiling. This made the price ceiling binding, leading to a severe shortage of gasoline.
Resolution: Eventually, laws regulating the price of gasoline were repealed, allowing the market to adjust.

Definition: Local government ordinances that limit rent increases for rental housing units (e.g., in New York and San Francisco).
Goal: To help the poor by making housing more affordable.
Critique: Many economists view rent control as a highly inefficient way to achieve this goal and often has negative long-term consequences.

Supply and demand elasticity: In the short run, both the supply and demand for housing are relatively inelastic.
- This means changes in price don't lead to large changes in quantity supplied or demanded quickly.
Effect: A binding rent control (