Why Price Controls are Inefficient

• Price controls

  • legal restrictions on how high or low a market price may go

• Price ceiling

  • a maximum price sellers are allowed to charge for a good or service

• Price floor

  • a minimum price buyers are required to pay for a good or service

• Whether the government tries to legislate price (up or down), there are predictable and unpleasant side effects.

Effective Price Ceiling

• Effective price ceilings must be below equilibrium price

• Rent control

  • government attempt in regulating price on apartments

  • Predictable outcome of housing shortage and emergence of black markets

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How a Price Ceiling Causes Inefficiency

• Inefficiently allocation to consumers

  • Those who want an apartment the most do not necessarily get it.

  • At $1000, someone who was willing to pay $2000 may not get the apartment when the price is low.

• Wasted resources

  • Price ceilings on gas led to shortages and forced millions of American to spend hours waiting in lines at gas stations. OPPORTUNITY COST!

• Inefficiently low quality

  • Sellers have little incentive to improve the quality of their product.

  • Landlords have a perverse incentive to only meet the bare, minimum requirements

Effective Price Floor

• Effective price floors must be above the equilibrium price.

• Minimum wage

  • government attempt in regulating the labor market in order to give workers a "fair" wage

  • Predictable outcome of having surplus of labor (or unemployment)

• What happens when a price floor on butter is set at $2.00 a pound when the equilibrium is $1.50

  • Predictable, there is a surplus of butter

  • Governments will stash away surplus, give away to schools, export at a loss, simply destroy the excess or pay farmers NOT to product at all.

  

• Graph

How a Price Floor Causes Inefficiency

• Inefficiently Low Quantity

  • Same impact as a price ceiling in having less quantity of goods bought and sold

• Wasted Resources

  • Just like families unsuccessfully looking for apartments under a price ceiling, workers won't find jobs in a price floor.

• Inefficiently high quality

  • Unable to compete for customers for lower prices, airlines provided lavish excesses consumers didn't want

Ineffective price controls