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Chapter Eight_074722

This chapter discusses price controls, which are government interventions that regulate the prices of goods and services. It explains two types of price controls: price ceilings, which create shortages and inefficiencies, and price floors, which lead to surpluses and wasted resources. Both mechanisms result in market inefficiencies, such as inefficient allocation of goods and services, wasted resources, and the emergence of black markets.

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10 views

Chapter Eight_074722

This chapter discusses price controls, which are government interventions that regulate the prices of goods and services. It explains two types of price controls: price ceilings, which create shortages and inefficiencies, and price floors, which lead to surpluses and wasted resources. Both mechanisms result in market inefficiencies, such as inefficient allocation of goods and services, wasted resources, and the emergence of black markets.

Uploaded by

jonathanchisenga40
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Price controls

8
CHAPTER
What we will learn in this chapter
• ➤ The meaning of price controls and quantity controls, two
kinds of government intervention in markets
• ➤ How price and quantity controls create problems and make
a market inefficient
Definition of price controls
 Price controls are pricing mechanism or
pricing strategies that government uses to
regulate or control the prices of goods or
services in an economy.
 Price controls are legal restrictions on how
high or low a market price may go.
Types of price controls

1. Price ceiling
2. Price floor
Price ceiling
1. Price Ceilings: This is the maximum legal
price set by the government.
 It is set below the equilibrium price.
 It ca also be said to be the maximum price
sellers are allowed to charge for a good.
 It’s an upper limit for the price.
 What this means is that, it is illegal to sell or
charge above the price ceill.
Price controls: price ceilings
• Price
Equilibrium
ceiling

S Price D S
Price D

4 4

3 3
Price
Ceiling
2 2

Shortage

100 200 Quantity of 800 Quantity of


100 200
icecreams icecreams
Price controls: price ceilings
• Because of these ceilings, we are faced with a
shortage.
• The shortage will lead to inefficiencies:
A market or an economy is inefficient if there
are missed opportunities: some people could
be made better off without making other
people worse off.
Price controls: price ceilings
• Let’s take a look at the different possible
inefficiencies:

1. Inefficient Allocation to Consumers


2. Wasted Resources
3. Inefficiently Low Quality
4. Black Markets
Price controls: price ceilings
Inefficient Allocation to Consumers
• Price ceilings can lead to inefficiency in the form of
inefficient allocation to consumers: people who really want
the good and are willing to pay a high price don’t get it, and
those who are not so interested in the good and are only
willing to pay a low price do get it.
• Example: rent control. In such case people get the appartment
usually through luck or personal connections.
Price controls: price ceilings
Wasted Resources
• Price ceilings typically lead to inefficiency in the form of
wasted resources: people spend money, time and expend
effort in order to deal with the shortages caused by the price
ceiling.
• You waste a lot of time looking for a good (e.g. an
appartment) in case of shortage, the time has it’s value! You
can work or just rest, do something better than look for a
good you’ can’t find.
Price controls: price ceilings
Inefficiently Low Quality
• Price ceilings often lead to inefficiency in that the goods being
offered are of inefficiently low quality
• In case of rent controls, the landlords will not improve the
conditions of the appartments, there is no incentive since the
rental fee is low but the main reason is that since there is a
shortage, people are willing to rent the apartment as it is,
even in bad condition!
Price controls: price ceilings
Black Markets
• A black market is a market in which goods or
services are bought and sold illegally—either
because it is illegal to sell them at all or because
the prices charged are legally prohibited by a
price ceiling.
• If someone for example bribes (gives extra
money) to the apartment owners he will get the
apartment, but the honest people that don’t
break the law will never find one this way!
Price floor
2. Price Floors: This is the minimum legal price
set by the government.
 It can be said to be the minimum price buyers
are required to pay for a good.
 It's a lower limit for the price.
 It is set above the equilibrium price, meaning
that it is illegal to buy a good below the price
floor.
Price controls: price floors
• Price
Equilibrium
floor

Surplus
Price D S Price D S

4 4

3 3
Price
2 Ceiling
2

100 200 Quantity of Quantity of


100 200 600
icecreams icecreams
Price controls: price floors
Price controls: price floors
Why a Price Floor Causes Inefficiency
• Inefficient Allocation of Sales Among Sellers
Price floors lead to inefficient allocation of sales among
sellers: those who would be willing to sell the good at the
lowest price are not always those who actually manage to
sell it. Example: Farm Subsidies
• Wasted Resources
Like a price ceiling, a price floor generates inefficiency by
wasting resources.
Price controls: price floors
Inefficiently High Quality and Quantity

Price floors often lead to inefficiency in that


goods of inefficiently high quality are offered:
sellers offer high-quality goods at a high price,
even though buyers would prefer a lower
quality at a lower price.
Or the seller offers more quantity than is
demanded and we are left with a surplus
End of Lecture

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