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Understanding Price Ceilings and Floors in Government Regulation

This text explores the implications of government-imposed price ceilings and floors on markets. Price ceilings, set below equilibrium prices, aim to assist consumers but often result in chronic shortages, as seen in the gasoline market. Conversely, price floors, established above market prices, are meant to support suppliers and can lead to chronic surpluses. The text discusses the consequences of these regulations and the economists' concerns regarding government intervention, highlighting how good intentions can yield negative effects on supply and demand.

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Understanding Price Ceilings and Floors in Government Regulation

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  1. September 27, 2013 • Collect Current Event • Finish Chapter 3 Notes: Ceilings and Floors • Review HW

  2. Government Set Prices • Sometimes government concludes that supply and demand will produce an equilibrium price that is unfair for buyer or seller… • Price Ceiling: Maximum legal price a seller can charge. • Designed to help the consumer! • Must be below equilibrium price!!! • Leads to chronic shortage!!! 3-2 LO5

  3. Price ceilings Gasoline $3.50 a gallon in burdensome to low-income people P S $3.50 P0 ceiling 3.00 PC D Shortage Q Qs Q0 Qd • There is a lasting shortage of gasoline: Qd exceeds Qs • So what does the government do now? Ration coupons? • Many buyers are willing to pay above Pc…Black Market? • What about Rent Controls? 3-3 LO5

  4. Government Set Prices • Price Floors: minimum price set by the government above the market price • Designed to help the supplier! • Leads to chronic surpluses 3-4 LO5

  5. Price Floors Wheat P S Surplus floor $3.00 Pf Minimum Wage? P0 $2.00 D Qs exceeds Qd Constant Surplus Q Qd Q0 Qs Government can decrease supply, increase demand, or buy and dispose of excess product 3-5 LO5

  6. Sound the alarm • Economists go crazy when government tries to impose ceilings or floors… • Good intentions produce many negative side effects.

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