Price ControlsCeilings and Floors

Lesson 2.8

Why Governments Control Prices

• There are times when the market price is considered unfair, to either the buyer, the seller, or both.

• Those who have market power (the ability to control prices) often use their power to create greater profits, called profiteering.

• The need for the government to intervene in these cases is call price controls, and can be in the form of price floors and price ceilings

Price ceiling• A price ceiling is a barrier that keeps the price lower than the

equilibrium point, as prices are not allowed to go higher than the price ceiling.

• An example of a price ceiling, Legal maximum price– Resource prices during WWII– Oil Prices in1970s– California electricity– New York City apartments

Price Ceilings

Price Ceiling Inefficiencies

• Inefficient Allocation to Consumers– Some willing to pay more do not get the resource

• Wasted Resources (Waiting in line)• Low Quality (Slums)• Black Markets

Price Floors

• A Price Floor is a barrier that keeps a price higher than the equilibrium point. In other words, the price cannot go lower than the price floor. – Minimum Wages– Agricultural Products– Air Travel– Trucking

Price Floors

Price Floor Inefficiencies

• Low Quantity (fewer ‘sales’)• Wasted Resources (unwanted surpluses)• Inefficiently High Quality (value added)– Airline service

• Illegal Activity

• Crain's New York Business, February 2012: "“Critics of [the minimum wage] proposal are making the same arguments as the last time the Legislature increased the minimum wage, in 2004. The hike to $7.15 an hour from the federal minimum of $5.15 was phased in over three years. If the change had a cataclysmic effect on businesses that depend heavily on minimum-wage workers, we certainly missed it. Objections . . . while meriting consideration, are essentially objections to the very existence of a minimum wage, which has been a fixture in the U.S. since 1938 and has never stopped our economy from flourishing.”