Price Controls

Price controls are government interventions in the market aimed at influencing the price of goods and services. They are typically used to address perceived market failures, such as monopolies, externalities, or inequality. The two main types of price controls are price ceilings and price floors.

Price Ceilings

A price ceiling is a legally mandated maximum price that can be charged for a good or service. It's intended to protect consumers by keeping prices affordable.

Impact of Price Ceilings

• Shortage: When a price ceiling is set below the equilibrium price, the quantity demanded exceeds the quantity supplied, leading to a shortage.
• Black Markets: Shortages can incentivize the emergence of black markets where goods are sold illegally at prices above the ceiling.
• Reduced Quality: Producers may reduce the quality of the good or service if they are unable to raise prices.
• Inefficient Allocation: Resources are not allocated efficiently as the price signal is distorted.

Example: Rent Control

Rent control is a common example of a price ceiling. It aims to make housing more affordable. However, it often leads to long waiting lists, reduced investment in rental properties, and a decline in the quality of rental housing.

Price Floors

A price floor is a legally mandated minimum price that can be charged for a good or service. It's typically used to protect producers, such as farmers.

Impact of Price Floors

• Surplus: When a price floor is set above the equilibrium price, the quantity supplied exceeds the quantity demanded, leading to a surplus.
• Government Intervention: The government often has to purchase the surplus to prevent waste or to support producers.
• Inefficient Allocation: Resources are not allocated efficiently as the price signal is distorted.
• Waste: Surpluses can lead to waste of resources.

Example: Minimum Wage

The minimum wage is a price floor set on the wage rate. It aims to protect low-wage workers. However, it can lead to unemployment if the minimum wage is set above the equilibrium wage. This is because some firms may choose not to hire workers at the higher wage.

Table Summarizing Price Controls

Policy	Price Level	Intended Beneficiary	Potential Consequences
Price Ceiling	Below Equilibrium	Consumers	Shortages, Black Markets, Reduced Quality, Inefficient Allocation
Price Floor	Above Equilibrium	Producers	Surpluses, Government Intervention, Inefficient Allocation, Waste

Suggested diagram: A supply and demand diagram illustrating the effects of a price ceiling and a price floor. The diagram should clearly show the equilibrium price and quantity, and how the price control alters these values.