Why Price Controls are Inefficient
- legal restrictions on how high or low a market price may go
- a maximum price sellers are allowed to charge for a good or service
- 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
government attempt in regulating price on apartments
Predictable outcome of housing shortage and emergence of black markets
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.
- 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.
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.
How a Price Floor Causes Inefficiency
Inefficiently Low Quantity
- Same impact as a price ceiling in having less quantity of goods bought and sold
- 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