Transcript Price Ceilings

Price
Government Intervention
Government Intervention
• Markets tend toward equilibrium, but
in some cases the government steps in
to control prices.
Government Intervention
• Price ceilings can be imposed by the
government to set the maximum price
that be legally charged for a good.
• Price floors can be imposed by the
government to set the minimum price
for a good or service.
Price Ceilings
• Governments place price ceilings on
some goods that are considered
“essential” and might become too
expensive for some consumers.
• Example: Ceilings on apartment rent
(rent control)
Price Ceilings
• Rent control reduces the quantity and
quality of housing, so it helps some
households and hurts others, including
many poor households.
Problems with Price Ceilings
• Price ceilings increase the quantity
demanded but decreases the quantity
supplied.
• Who decides which of the 20,000 of
the 40,000 households get an
apartment?
• Long waiting lists, bribes, corruption.
• Ending rent control hurts some, helps
others.
Price Floors
• Price floors are often imposed when
government wants sellers to receive
some minimum reward for their
efforts.
Price Floors
• Minimum Wage – price floor that sets a
minimum price that an employer can
pay a worker for an hour of labor.
• Set by federal government – state’s
can set it higher.
• If the minimum wage is set above the
market equilibrium wage rate, the
result is a decrease in employment.
Price Floors in Agriculture
• Used for many farm products.
• Until 1996, the US set minimum prices
for several products.
• Not legal limits.
• When prices fell below the price floor,
the government created demand by
buying excess crops.
Price Floors in Agriculture
• Congress abolished agricultural price
floors because they conflicted with free
enterprise.
• Today, the government responds to
low product prices with emergency
financial aid.