Microeconomics Chapter 8: Price Ceilings and Floors

-Laws that make it illegal for prices to move above a maximum price (price ceilings) or below a minimum price (price floors).
-Nixon made it illegal to to raise prices-even if both buyers and sellers voluntarily agreed to exchange.
-Eliminate Incentives

-A maximin price allowed by law.
-Result in Shortages, Reductions in product quality
Wasteful lines and other search costs, a loss of gains from trade, a misallocation or resources.

-When prices are held below the market price, the quantity demanded exceeds the quantity supplied.
-Lower the controlled price is relative to the market equilibrium price, the larger the shortage.

-At consoled prices sellers find there is an excess of demand, or sellers have more customers than goods.
-Results in lower quality.
-sellers lower service

-Knowing there is a shortage, some buyers might bribe station owners to fill up their tank.
-Bribes are illegal but bring prices up to their normal price. Ex original price of gas=$3g, consoled gas=$1g, 20g + 40 dollar bribe=$60.
-Buyers compete in time, their willingness to want it.
-$20 paid to gas station, $40 lost in time waiting=original price $60.
-Paying in time is much more wasteful because owner doesn't get it.

the total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited. Price ceilings create a deadweight loss

Occurs when a good or service is not consumed by the person who values it the most, and typically results when a price ceiling creates an artificial shortage in the market.
-Goods are relocated according to random factors.

Shortages in one market create breakdowns and shortages in other markets, so the chaos of price control expands into markets without price control.

-Reagan ended price controls on oil and gasoline
-Price rose a little bit, but shortages ended. Prices then lowered.

-Uber will charge a higher price when demand is high
-When Uber price goes up by 10%, the quantity demanded falls by about 5.1%, for a price elasticity of -0.51
-Price control would not allow demanders to signal.

-A price ceiling on rental housing.
-Results in shortages, reduces quality, crate wasteful lines and increase the costs of search, cause a loss of gains from trade, and misallocate resources.

-Short run supply curve is inelastic.
-Only small reduction in the quantity of apartments supplied in the short run.
-In the long run, fewer new apartments are built and older units are tuned into condos or torn down and made into parking garages.
-A rent control below the equilibrium price generates a shortage. The short-run shortage is small since the apartment units are already built. In the long run, fewer new units are built and old apartment are torn down or turned into condos so the long-run shortage is much greater.

-Rent controls reduce housing quality-especially with the low end apartments.
-With rent controls owners mow the lawn less often, replaced light bulbs more slowly, etc.
-With Strong rent control, manageable buildings turn into slums.

-Searching for an apartment can be especially costly for people whose landlords believe they are not "ideal renters"
-prefer people who are older, richer, no pets.
-landlords can discriminate, more demanders than suppliers.
-Price of discrimination falls, quantity of discrimination demanded will increase.
-Bribes are illegal but can be disguised in "key money"

People with a high willingness to pay can't buy as much housing as they want, even as others with a low willingness to pay consume more housing than they would purchase at the market rate.

limits price increases without limiting prices. Prices increases, for example, might be limited to, say, 10% per year. Thus, ____ __________ can protect tenants from sharp increases in rent, while still allowing prices to rise or fall over several years in response to market forces. These ____ __________ laws usually also allow landlords to pass along cost increases so the incentive to cut back on maintenance is reduced.

-If price controls were the only way to help the poor they would be good.
-Housing vouchers- gov gives poor people monthly money for housing. Increase supply of housing, increases taxes
-Public does not see consequences of price controls.

-An economy with permanent price controls is called a "command economy"
Ex. soviet union
-People obtained goods through "blat" -connection and something to trade.
-"only effective if your idem is scarce.

a minimum price allowed by law
-prices above market levels
-sellers outnumber buyers. Ex. Min wage.

-Surpluses
-Lost gains from trade (deadweight loss)
-Wasteful increases in quality
-A misallocation of resources

Quantity of labor supplied exceeds quantity of labor demanded.
-min wage decreases employment for unskilled workers.

-lost consumer surplus plus lost producer surplus.
-higher min wage gives the incentive to replace or move production
-capital can be substitutes.

-Price floor encourages sellers to waste resources by producing more quality than buyers are willing to pay.
-Due to the price floor, sellers can't compete by offering lower prices so they compete by offering higher quality. This raises costs and reduces seller profit. Buyers would prefer lower quality at lower price.

-Restrictions of airline entry misallocated resources because low cost airlines were kept out of the industry.
-CAB kebt Southwest out of international flights.
-Southwest reduced costs
-Deregulation is why we fly today.