• Price Ceilings:
• With price ceilings, Qd>Qs=Shortages!
  
• • A price ceiling is the HIGHEST legal price a seller may charge for a product or service
    • Rationale: A price ceiling allows consumers to obtain some "essential" good or service that they could not afford at the equilibrium price because it was too high before.
    • a price above the ceiling is illegal; a price below is not
  • The government puts a price ceiling on gasoline to keep it affordable to households unable to afford gasoline at the equilibrium price
  • Problems: a price ceiling is below the equilibrium therefore it creates a shortage; See diagram on right
    • An unregulated shortage would mean unequitable distribution of gasoline.
      
    • Gas Stations must decide how to distribute the short supply of gasoline (first come first serve)
    • rise of a black market
    • prevents usual market adjustmnet in which competition among buyers bids up price, inducing more production ad rationing some buyers out of market
    • market disequilibrium
  • Solutions: Ration coupons (fixed amounts for every family). Governments can also give subsidies to the producers, shifting supply curve right, and meeting the Qd at the price of the price ceiling.

• 
• EXAMPLE of price ceiling: Rent Controls
  Rent controls are MINIMUM rents established by law (or maximum rent increases for existing tenants).

Goals of Rent Controls:

• Meant to protect low-income families from rising rents caused by perceived housing shortages
  • Although rent controls are often established to lessen effects of perceived housing shortages, they are actually a primary cause of such shortages.
    
• Intended to make housing more affordable to the poor.

Economic Effects of Rent Controls:

• On demand side: As long as rents are below the equilibrium, more families are willing to consume rental housing; the quantity of rental housing demanded increases at the lower price
• On supply side: price controls make it less appealing for landlords to offer housing in the rental market.
  • In the short-run:
    • Owners may sell rental units or convert them into condos
  • In the long-run:
    
    • Even though rent can rise each year, the amount of growth that is allowed is so small that rent remains low and makes it unprofitable for owners to repair or renovate their rental units
    • As there are no rent controls when it comes to office buildings, shopping malls, or motels, many potential investors would rather invest in those than in rental housing.

Rent controls distort market signals resulting with misallocated resources:

• Too little resources are being allocated to rental housing, and too many are allocated to other uses.
• Thus, many American cities have either already abandoned or are in the process of getting rid of rent controls.
  
  

Price Floors:Qs>Qd=Surplus!

• Price floor - MINIMUM price of a good fixed by the government.
• Price greater than to the price floor is legal, while a price that is lower than the price floor is illegal.
• rationale: Governments set price floors to protect the welfare of certain suppliers by maintaining a higher price and thus maintain a sufficient income.
• In addition to agricultural price supports, another form of price floor is minimum wage regulations
• According to the laws of supply and demand. A higher price = more quantity supplied and less quantity demanded, thus creates a surplus in goods
• How the government deals with the surplus from the price floor
  • They could restrict supply or increase demand, thereby closing the gap of surplus.
  • Or they could purchase all the surplus output at market price (i.e. subsidies)

Side Effects:

• Distorted resource allocation/ Inefficiency - too many resources are devoted into the product that could otherwise have satisfied another market of higher demand.
• Retaliative tariffs - as the government imposes tariffs to keep out imports in order to reduce competition and protect the domestic price floor, foreign countries will impose retaliative tariffs on American imports
• The government has to manage the surplus of wheat which is not demanded by the consumers; the government has to export wheat to other countries that is short of it or dispose the leftovers.
• higher taxes to pay for subsidies
• The government then has to keep getting involved in the economy to right a mistake, and thus lassaiz-faire economics will be destroyed.
• There will always be a surplus because the producers are unable to lower the price to reach equilibrium.

Example of Price Floor

• Wheat farmers have very low incomes
• So the government decides to intervene and raise the price of wheat, from the market price of $1 per bushel to $3 per bushel
• Hooray! Now the wheat farmers incomes have rose!
• Unfortunately, some consumers are no longer willing to buy wheat, and turn to cheaper substitutes
• Additionally, other farmers attempt to cash in on the increased price of wheat and invest in the wheat growing business
• There is now a surplus of wheat that goes unsold, and some farmers go out of business (although other farmers do benefit)
• The BEST way to increase wheat farmers' wages is for the government to introduce subsidies to the industry so that the wheat market may be efficient while farmers' incomes increase.

*Note*: An easy way to remember the different between a price ceiling and price floor is to imagine/draw an upside down house on the graph, so as to be able to differentiate between the two concepts effectively and without confusion