Price Ceilings: Waste, Deadweight Loss, Misallocation of Resources

Price controls don’t eliminate competition, they just change the form of it
- Paying in time is much more wasteful than a bribe
- When a buyer bribes a gas station owner $40, at least the gas station owner gets the bribe
- When a buyer spends $40 worth of time waiting in line, gas station owner doesn’t get anything
- The bribe is transferred from buyer to seller, but the time spent waiting in line is simply lost

Price controls also reduce gains from trade
Deadweight loss: the reduction in total surplus caused by a market distortion or inefficiency
In a free market, the quantity of goods sold maximizes the sum of consumer and producer surplus
- In a market with a price ceiling, the sum of consumer and producer surplus is not maximized because the price control prevents mutually profitable gains from trade from being exploited

Price controls distort signals and eliminate incentives
Ex: it’s sunny on the west coast of the US, but on the east coast a cold winter increases the demand for heating oil
- In a market without price controls, the increase in demand in the east pushes up prices in the east
- Entrepreneurs buy oil from the west where price is low and move it to east where price of oil is high because people are cold
- Price increase in east is moderated and supplies of oil move to where they are needed most
Ex: now consider what happens when it’s illegal to buy or sell oil at a price above a price ceiling
- No matter how cold it gets in the east, the demanders of heating oil are prevented from bidding up the price of oil, so there’s no signal and no incentive to ship oil to where it’s needed most
- Price controls means that oil is misallocated
In a free market, the supply of goods is bought by the demanders who have the highest willingness to pay
In a market with a price ceiling, demanders with the highest willingness to pay have no easy way to signal their demands and suppliers don’t have an incentive to supply their demands