AP Economics
Mr. Bernstein
Module 8:
Price Controls: Ceilings and Floors
October 2015
AP Economics
Mr. Bernstein
Price Controls
• A legal restriction on how high or low a market
price may go
• Enacted by governments in response to political
pressures from buyers and sellers
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AP Economics
Mr. Bernstein
Price Ceilings
• Examples
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Resources during WWII
New York City apartments (rent control)
Food prices in Venezuela
Salary Caps in Major League Sports
Credit Card interest rate caps
Where would you like to see price ceilings?
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AP Economics
Mr. Bernstein
Modeling a $2 Price Ceiling on Tacos
• Qd ~= 6
• Qs~= 4
• Shortage = 2
• Who benefits?
• Notice the price
ceiling is below
equilibrium on
a graph
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AP Economics
Mr. Bernstein
Inefficiencies of a $2 Price Ceiling on Tacos
• Inefficient Allocation to Consumers
• Some willing to pay $5 get none, some unwilling to pay
$5 will be able to buy at $2
• Wasted Resources
• Consumers spend time and other scarce resources
chasing shortages (incurring opportunity costs)
• Lower Quality Products
• Black Markets
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AP Economics
Mr. Bernstein
Why do Price Ceilings Exist?
• They do benefit some consumers!
• Those with political clout gain
• Once in place, there is uncertainty about removal
effects
• Government officials may not understand supply
and demand effects
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AP Economics
Mr. Bernstein
Price Floors
• Examples
• Minimum Wage
• Agricultural Products
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AP Economics
Mr. Bernstein
Modeling a Price Floor on Tacos
• Excess Supply
• Notice the price
floor is above
equilibrium price
on a graph!
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AP Economics
Mr. Bernstein
Inefficiencies of a Price Floor
• Quantity Demanded falls due to price increase
• Quantity bought and sold falls, creating TU loss to society
• Producers willing to sell at equilibrium price may not
be the ones lucky enough to make sales
• Inefficiently high quality products
• Wasted Resources
• Producers may begin adding extravagant ingredients not
even desired by buyers in market in equilibrium
• Illegal activity
• ie working below minimum wage due to surplus labor supply
• Encourages bribery and corruption of government officials
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AP Economics
Mr. Bernstein
Why do Price Floors Exist?
• They do benefit some producers!
• Those with political clout gain
• Once in place, there is uncertainty about removal
effects
• Government officials may not understand supply
and demand effects
10
AP Economics
Mr. Bernstein
Defining Deadweight Loss
“Losses associated with quantities of output that are
greater than or less than the efficient level, as can
result from market intervention such as taxes, or
from externalities such as pollution.” Krugman
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AP Economics
Mr. Bernstein
Defining Deadweight Loss: Price Floors
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AP Economics
Mr. Bernstein
Defining Deadweight Loss: Price Ceilings
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