price controls: ceilings and floors - edl 550 unemployment min wage laws do not affect highly...
TRANSCRIPT
The Market for Apartments
P
QD
SRental price
of apts
$2800
300
Quantity of apartments
$3500
$2500
What price should the price ceiling be set at?
How Price Ceilings Affect Market Outcomes
A price ceiling above the equilibrium price is not binding –it has no effect on the market outcome.
P
QD
S
$2800
300
Price ceiling
$3500
How Price Ceilings Affect Market Outcomes
The price ceiling
must below the market price to be effective.
A PC of $2500
would actually make housing more affordable.
P
QD
S
$2800
Price ceiling
$2500
250 400
How Price Ceilings Affect Market Outcomes
What is the
unintended consequence of this price ceiling?
What happens to
the quality of apartments that remain on the
market?
P
QD
S
$2800
Price ceiling
$2500
250 400
shortage
$2800
300
Price Ceiling
� Government imposes a maximum
price less than Pe.
� Generally on essential items that
have a very high market equilibrium price.
� ex. housing � rent control
� This generates a shortage (Qd > Qs).
� The market mechanism cannot clear
the market.
� A permanent shortage exists. D
SP
Q
Pe
Qe
Price
ceiling
Qs Qd
Shortage
Shortages and Rationing
� With a shortage, sellers must ration the goods among
buyers.
� Some rationing mechanisms: (1) long lines (2) discrimination according to sellers’ biases
� These mechanisms are often unfair, and inefficient: the goods don’t necessarily go to the buyers who value them most highly.
� In contrast, when prices are not controlled, the rationing mechanism is efficient (the goods go to the
buyers that value them most highly) and impersonal (and thus fair).
How Price Ceilings Affect Market Outcomes
How many
apartments would have been rented if there was no price
ceiling?
How many apartments are rented with this price
ceiling?
P
QD
S
$2800
Price ceiling
$2500
250 400
300
250 – only 250 can be rented if only 250 are supplied
$2800
300
How Price Ceilings Affect Market Outcomes
This price ceiling caused a loss of trades.
P
QD
S
$2800
Price ceiling
$2500
250 400
$2800
300
MISSED OPPORTUNITIES!!!
Price Floor
� Government imposes a minimum
price greater than Pe.
� Generally on essential items that
have a very low market equilibrium price
� ex. agricultural price supports,
minimum wage
� This generates a surplus (Qs > Qd).
� The market mechanism cannot clear the market.
� A permanent surplus exists.
D
SP
Q
Pe
Qe
Price
floor
Qd Qs
Surplus
How Price Floors Affect Market Outcomes
The floor is a binding constrainton the wage, and causes a surplus of labor (unemployment).
W
LD
S
$4
Price floor
$5
400 550
labor surplus
$4
500
The Minimum Wage
W
LD
S
$4
Min. wage
$5
400 550
unemployment
Min wage laws
do not affect
highly skilled workers.
They do affect
teen workers.
WHY?
Studies:
A 10% increase
in the min wage raises teen
unemployment by 1-3%.
What are the effects of price controls?
� Persistent shortages/surpluses
� A loss of gains from trades (DWL)
� Reduction in quality or inefficiently high quality
� Misallocation of resources� The person that needs the good may not end up getting it.
� Wasted time, effort and resources
� Emergence of black markets
WHY?
Price controls take away incentives that would otherwise regulate markets.
� Prices efficiently allocate resources. Resources
will only be used for only the most valuable purposes.
� Prices as Signals and Incentives
� Prices tell consumers and suppliers how to adjust. High prices are an incentive to suppliers to supply more. Low prices tell producers that a good is being over produced.
� Low prices to consumers signal to buy more of a good. A
high price is a sign to stop and think carefully before buying.