Transcript Price and Quantity Controls

PRICE AND QUANTITY
CONTROLS
Mr. Bordelon
AP Economics
Price Controls

Price control. A legal restriction on how high or low
a market price may go. Price controls are enacted
by governments in response to political pressures
from buyers and sellers.
Price Ceiling
Price Ceilings
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Price Ceiling. Maximum price sellers are allowed
to charge for a g/s.
If PE is “too high” then a price ceiling (PC) must be
set below PE. A PC set above PE has no effect.
Effects of a Price Ceiling

Shortage. QD – QS
 In

theory, consumers are helped by the lower price.
 In practice, only those who got the g/s are helped.
 Price ceilings ALWAYS cause shortages.
Inefficient Allocation to Consumers. With a price ceiling,
people who want the good and are willing to pay a higher
price don’t get it. Those who care less about the good, and
are only willing to pay a low price do get it. Luck of the
draw.
Effects of a Price Ceiling

Wasted Resources. People spend money, time and
effort in order to deal with shortages caused by the
price ceiling.
 Time
spent has an opportunity cost. Time spent
looking for g/s has an opportunity cost—working,
playing, studying, etc. This creates inefficiency to the
price control.

Inefficient low quality. With a PC, sellers will offer
low-quality goods, though buyers prefer higher
quality, even at a higher price. No incentive for
sellers to provide higher quality.
Effects of a Price Ceiling

Black Market. A market in which g/s 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.
Why Have Price Ceilings At All?



They do benefit some consumers. Consumers may
have political clout to persuade government that PE
is taking advantage of them.
Long term. If a PC is in effect for a while, buyers
may not have a realistic idea of what would
happen without them.
Politicians are idiots. Government officials often
do not understand supply and demand analysis.
Price Floor
Price Floors

Price Floor. A legal minimum price buyers are
required to pay for a good.
 Minimum
Wage. A legal floor on the wage rate, which
is the market price of labor.
 If PE is considered “too low,” a price floor (PF) is set
above PE. A PF set below PE has no effect.
Effects of a Price Floor

Surplus. PF lead to excess supply. QS – QD
 In
theory, sellers helped by the higher price.
 In practice, sellers now have extra g/s, because there
are less people willing to buy g/s at PF.
 Price floors ALWAYS cause surpluses.

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.
Effects of a Price Floor

Wasted resources. Government price floors set
above PE causes surpluses which the government
may be required to buy and destroy.
 Minimum
wages result in fewer jobs available and
those who’d be willing to work for less waste time
searching for a job.

Inefficiently low quantity. Since a PF raises the
price of a good to consumers, QD falls, so the
quantity bought and sold falls, creating a loss to
society.
Effects of a Price Floor


Goods of inefficiently high quality. Sellers offer
high-quality goods at a high price, even though
buyers would prefer a lower quality at a lower
price.
Illegal activity. Price floors encourage bribery of
sellers or government officials.
 Minimum
wage laws give an incentive to work under the
table because there is a surplus of labor willing to
work.
Why Have Prices Floors At All?


They do benefit some producers. Producers may
have political clout to persuade government that PE
is unfairly low.
Politicians are idiots. Government officials often
do not understand supply and demand analysis.
Quantity Controls
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Quantity control/quota. Upper limit on the
quantity of some good that can be bought or sold.
Quotas are set by government.
License. Gives its owner the right to supply a g/s.
Anatomy of Quantity Controls
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PD: Demand price is price at which consumers will
demand that quantity.
PS: Supply price is price at which producers will supply
that quantity.
Quantity control drives a wedge between PD and PS of
a good.
Quota rent is the difference between PD and PS.
Earnings that accrue to license-holder from ownership of
right to sell good. It is equal to the market price of the
license when licenses are traded.
Costs of Quantity Controls

Inefficiency. Mutually beneficial transactions don’t
occur. Anytime PD at any given quantity is not equal
to PS at that quantity, there will be missed
opportunities.
 Deadweight
loss. Lost gains associated with
transactions that do not occur due to market
intervention.

Incentives for illegal activities. Suppliers know
additional units could be supplied and buyers could
be found. This overproduction violates the quota.