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Price Controls in the
Product Market
Understand how price controls affect the
marketplace
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Rent Control in NYC…
Jimmy McMillan
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Government Intervention in the
Marketplace is Always Controversial
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But why is that???
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Price Ceiling
• A maximum price sellers are
allowed to charge for a good or
service
• Government imposed
restriction on the free market
• Ceilings are effective below
equilibrium
• Creates a shortage in the
housing market—or whatever
market a ceiling is placed
within
• Quite often lead to inefficiency
in the marketplace
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Price Ceilings Creating
Inefficiency
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Inefficient Allocation to Consumer: people who are willing and
able to buy the good/service at equilibrium price don’t get it
and those who care relatively little about acquiring the
good/service and who are only willing to pay a lower price
do get the good/service...leads to missed opportunities
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Wasted Resources: people expend money, time, and effort to
cope with shortages caused by the price ceiling…missed
opportunities
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Inefficiently Low Quality: the goods being offered under a
shortage are not of the high quality that buyers are expecting
from the marketplace
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Results of Price Ceilings
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Persistent shortage of the good/service affected
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Inefficiency arising from the persistent shortage
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Emergence of black markets
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Allocation, resources, quality
The illegal buying or selling of a good/service—either because
the good is illegal or because it is illegal to sell above a certain
price
Then WHY???
• In theory, some people benefit: gives much cheaper housing to
people that couldn’t afford their rent otherwise
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State Minimum Prices
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Price Floor
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Minimum price buyers
are required to pay for a
good/service
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Government restriction
on the price of a good
that can be charged in
the marketplace
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Floors are effective above
equilibrium
• Creates a surplus in the
market of whatever good it
is imposed on
• Frequently, the government
will buy up the surplus
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Price Floors Create Inefficiency
Inefficiently Low Quantity: Reduced quantity demanded (surplus)—sellers
cannot sell if buyers will not buy. Therefore, a price floor reduces the the
quantity of a good bought and sold below market equilibrium
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So, both floors and ceilings reduce the quantity of goods being bought and sold
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Inefficient Allocation Among Sellers: Those who would be willing to sell the
good at the lowest price are not always the producer who can manage to
sell it
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Wasted Resources: Wasted supply of the good produced, time, effort and
energy
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Inefficiently High Quality: The goods offered for sale in the marketplace
are often high-quality and sold at a high price, although buyers would
prefer low-quality, low-priced goods
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Illegal Activity: Creates incentive for people to behave illegally in the
marketplace
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Results of Price Floors
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Persistent surplus of the good
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Inefficiency arising from
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Low quantity, poor allocation, waste, high quality, illegal activity
Then, WHY???
• Sellers stand to benefit from the minimums placed on the sale
prices of their goods…agriculture industry in the US
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When Floors and Ceilings are
Irrelevant
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If a price floor is below equilibrium price
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If a ceiling is above equilibrium price
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Both of these scenarios would render the price control irrelevant
and ineffective in the marketplace
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For example: Market for cheese…