Economics What are 'Price Controls' Price controls are government-mandated legal minimum or maximum prices set for specified goods, usually implemented as a means of direct economic intervention to manage the affordability of certain goods. Governments most commonly implement price controls on staples, essential items such as food or energy products. Price controls that set maximum prices are price ceilings, while price controls that set minimum prices are price floors. The long history of governments implementing price controls has shown that, at best, they are only effective measures on an extremely short-term basis. Over the long term, price controls inevitably lead to problems such as shortages, rationing, deterioration of product quality and black markets that arise to supply the price-controlled goods through unofficial channels. One example in the United States is the price controls set on gasoline established during the Nixon administration, which eventually led to major shortages in supply and long, slow lines at gas pumps. Rent controls are another frequently cited example of the ineffectiveness of price controls. Rent control policies widely implemented in New York City were intended to help maintain an adequate supply of affordable housing. However, the actual effect has been to reduce the overall supply of available rental space, which in turn has led to even higher prices in the market of available rental housing. The net effect of rent controls is to discourage real estate entrepreneurs from becoming landlords, thus creating a supply situation in which there is less rental housing available than the amount that would be created by the free market, thereby putting continual upward pressure on rental rates. Controlled rental rates also effectively discourage landlords from making the necessary expenditures to maintain or improve rental properties, leading to deterioration in the quality of rental housing As a government measure, price controls may have been enacted with the best of intentions, but in actual practice, they don't work. No attempt to control prices can overcome the basic economic forces of supply and demand for any significant length of time. When prices are established by commerce in a free market, prices shift to maintain the balance between supply and demand. However, when a government imposes price controls – precisely because it refuses to accept the free market equilibrium price – then the eventual, inevitable consequence is the creation of excess demand in the case of price ceilings, or excess supply in the case of price floors. #UCP Again, the gasoline price controls of the 1970s provide a classic example. No government attempts to cap the price of gasoline could change the basic economic fact that gasoline producers were only willing to sell an extremely limited supply of gasoline for the price set by the government. This resulted in extreme shortages in gasoline.

1. Final Project: Economics
Price Floors
&
Price Ceilings

2. Group Members
A. Abrar
Fahad .H. NooR

3. Topic For The Final Presentation
Price Controls
Price Ceilings
Price Floors

4. Introduction to Topic
 In a free, unregulated market system, market
forces establish equilibrium prices and exchange
quantities.
 While equilibrium conditions may be efficient, it
may be true that not everyone is satisfied.
 One of the roles of economists is to use their
theories to assist in the development of policies.

5. Price Controls
A state of Disequilibrium exists in the market
whenever it is operating at a non-equilibrium
price and quantity
The Government can force market a market to
operate at disequilibrium through use of Price
Controls.
Price controls restrict the price at which a good or
service can be sold

6. There are two types of price
control:-
1) Price Ceiling:
Maximum price that can be
charged for a good.
2)Price Control:
Minimum price that is required to
pay for a good.

7. How Price Ceilings Affect Market
Outcomes
 Two outcomes are possible when the government
imposes a price ceiling:
– The price ceiling is not binding if set above the
equilibrium price.
– The price ceiling is binding if set below the equilibrium
price, leading to a shortage.

8. Figure 1 A Market with a Price Ceiling
(a) A Price Ceiling That Is Not Binding
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Equilibrium
quantity
$4 Price
ceiling
Equilibrium
price
Demand
Supply
3
100

9. Figure 1 A Market with a Price Ceiling
Copyright©2003 Southwestern/Thomson Learning
(b) A Price Ceiling That Is Binding
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Demand
Supply
2 Price
ceilingShortage
75
Quantity
supplied
125
Quantity
demanded
Equilibrium
price
$3

11. Effects of Price Ceiling:
 Shortages
 Nonprice Rationing
 Reduction of product quality

12. Winners or losers
Who gains and loses with price ceiling
 Gains – Consumers
 Loses – Producers

13. Example:
Rent controlled apartments
 City or state determines the maximum amount
that can be charged for rent on apartments.

14. How Price Ceilings Affect Market
Outcomes
 Effects of Price Ceilings
 A binding price ceiling creates
– shortages because QD > QS.
 Example: Gasoline shortage of the 1970s
– nonprice rationing
 Examples: Long lines, discrimination by sellers

16. Price Floors
A price floor sets the minimum price or floor, at
which a good/service can be sold

17. How Price Floors Affect Market
Outcomes
 When the government imposes a price floor, two
outcomes are possible.
 The price floor is not binding if set below the
equilibrium price.
 The price floor is binding if set above the
equilibrium price, leading to a surplus.

18. Figure 4 A Market with a Price Floor
(a) A Price Floor That Is Not Binding
Quantity
0
Price
Equilibrium
quantity
Price
floor
Equilibrium
price
Demand
Supply

19. Figure 4 A Market with a Price Floor
(b) A Price Floor That Is Binding
Quantity0
Price
Demand
Supply
Price
floor
Quantity
demanded
Quantity
supplied
Equilibrium
price
Surplus

20. Price Floors Affect Market
Outcomes
 A price floor prevents supply and demand from
moving toward the equilibrium price and quantity.
 When the market price hits the floor, it can fall no
further, and the market price equals the floor
price.

21. How Price Floors Affect Market
Outcomes
 A binding price floor causes . . .
– a surplus because QS > QD.
– nonprice rationing is an alternative mechanism for
rationing the good, using discrimination criteria.
 Examples: The minimum wage

22. The Minimum Wage
 An important example of a price floor is the
minimum wage. Minimum wage laws dictate the
lowest price possible for labor that any employer
may pay.