Price Controls

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Price Controls

• Price Floors and Price Ceilings

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Objectives

• Define and describe price floors and price
  ceilings.
• Illustrate price ceilings and floors on graphs.
• Analyze the effects of price ceilings and floors
  in terms of surpluses and shortages
• Analyze how prices act as incentives that
  influence human behavior.
• Describe the negative side effects of price
  controls.
• Describe and evaluate the arguments for and
  against price controls.

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Price Ceiling A Maximum legal price that may be
charged for a good or service set below the
market equilibrium price.

• Persistent shortage develops because quantity
  demanded exceeds quantity supplied.
• An illegal of Black Market often develops to
  supply the commodity.
• Prices charged on black markets are often higher
  than those that would prevail in the free market.
  (Ticket Scalping)
• .A substantial portion of revenue falls into the
  hands of the illicit supplier instead of going
  those who produce the good or perform the
  service.
• Queuing
• Favored Customers (Discrimination)
• Ration Coupons
• Investment is the industry generally dries up.

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Price Floor A Minimum legal price that may be
charged for a good or service set above the
market equilibrium price.

• A surplus develops as sellers cannot find enough
  buyers.
• Where goods are involved, the surplus creates a
  problem of disposal.
• To get around the regulators, sellers may offer
  discounts in disguised and often unwanted forms.
• Regulators that keep prices artificial high
  encourage over investment in the industry.