Price Controls

Price Ceilings

Learning outcomes:
Explain why governments impose price ceilings, and
describe examples including price & rent controls.
Draw a diagram to show a price ceiling, and analyze the
impacts of it to market outcomes
Examine possible consequences of a price ceiling:
shortages, inefficient resource allocation, welfare
impacts, black markets, non-price rationing.
Discuss the consequences to the stakeholders including
consumers, producers and the government.

Price Ceiling
a maximum price for specific goods and
services set by the government.
For it to be effective it must be set below the
market equilibrium.
Government often implement price ceilings
on basic goods and services making it more
affordable for poorer residents.

Constraining Price Ceiling

Price & Quantity Equilibrium: (3, 30)
Market is allocatively efficient.
Government intervenes and places
max price for good at 2
Creates disequilibrium in the market
Allocatively inefficient
Shortage exists: Qd(40) > Qs(20)
Shortage 20 units

Effects of Price Ceilings

Shortages exist:
Consumers buy more - Artificially low price
creates excess quantity demand for the
product.
Producers - cut production (quantity
supplied) in response to lower prices.
Result is a shortage in the marketplace.

Effects of Price Ceilings

Non-price Rationing:
Without the pricing mechanism to ration goods,
consumers & producers will use other means to
ration the goods:
Government created ration cards
Waiting in lines
Bartering

Effects of Price Ceilings

Decrease in Market Size:
At a low maximum price, output will be
limited thus Producer Surplus will shrink.
Less overall utility to both consumers and
producers.

Effects of Price Ceilings

Elimination of Allocative Efficiency:
Achieved when the market is in equilibrium.
Supply = Demand.
When the market is in disequilibrium as is
the case with government imposed pricing,
the market becomes allocatively inefficient.

Effect of Price Ceilings

Informal (black) Markets:
With the shortages created by
government imposed maximum
pricing, there are some people who
are willing and able to pay more for
the good thus creating informal
marketplaces.
Government imposed price: Pceiling
Pf: Informal (Black) Market Price

P*: Market Equilibrium Price

Consumer & Producer Surplus

Since the market is in disequilibrium
and allocatively inefficient:
Producer Surplus decreases
Deadweight Loss (Total Welfare
Loss) exists
Effects of Price Ceiling
represent the TWL
http://i.ytimg.
com/vi/1qZQe7vgNf4/maxresdefault.jpg

Examples of Price Ceilings

Rent Controls
Do Rent Controls exist in Tanzania?
What are the effects of these controls on the areas they are
in?

Foods, staple items, rice, bread.