- Price controls, including price ceilings, price floors, and quantity controls like quotas, lead to inefficient market outcomes and deadweight losses. - Price ceilings cause underproduction as suppliers face prices below the market equilibrium. Price floors cause overproduction as demand is below the new higher market price. Both result in surpluses and shortages. - Quantity controls also reduce market efficiency and total surplus by restricting quantities traded to a level other than what supply and demand would determine. This creates shortages or surpluses and deadweight losses.

1. {
Government intervention in the markets
Price Controls

2. {
Saint Thomas Aquinas,
(1225 – 7 March 1274)
Thomas is held in the Catholic Church to be
the model teacher for those studying for the
priesthood, and indeed the highest expression
of both natural reason 自然的逻辑 and
speculative theology 投机神学.
So, he and others
asked this question…

3. {
What is an ethical price?
合乎道德的

4. Hurricane飓风
2012 Hurricane Sandy
New York,
modern day
example

5. Lots of homes are destroyed and
services and gas supplies have
been cut and there is not enough
for the people.

6. The governor of
New York has a job
to help people

7. Gave away free gasoline to help people 免费汽油
is that ethical?
合乎道德的

8. The governor of
New Jersey has a
job to help people

9. People only pay a little more, and gas rationing汽油配给
is that ethical?
合乎道德的

10. Outcome of these policies
is long lines for gas with
many people going
without it.

11. And those that got their
first…

12. Hoarding
囤积居奇
Price gouging
价格欺诈

13. This led to the
emergency services
couldn’t get the
supply they needed

14. Free and rationed gas didn’t
lead to MORE gas (the real
problem) and those that really
needed it didn’t get it.

15. {
What is an ethical price?
合乎道德的
What seems ethical might
not be. What do you see?
What do you not see?
If you control the price, do
you make things better or
worse?

16. The Cobra Effect
眼镜蛇
Sometimes actions lead to
unintended consequences
called this.

17. Free toll roads during 国庆节
Better or worse?

18. {
Government intervention in the markets
Price Controls

19. An Example Question:
Price Controls
You are the mayor市长 of a major city like
Shanghai. The price of apartments in your
city is extremely high and many people
cannot afford it. You want to help the people
out and make housing more affordable for
the people. What do you do?
One thing you can do is lower the price
allowed for people to sell their apartments so
more people can afford the lower price.
However this may have unforeseen
consequences.

20. Another Example Question:
Price Controls
You are a the mayor市长 in Shanghai. Your
city has many workers that work in
factories that make a very poor wage that
is not enough for them to live a decent
life. Food prices are high, housing prices
are high and the wage they get is barely
enough to eat and survive, how can you
help these people?
Perhaps you can institute a minimum wage
that makes it so they have to be paid at
least a certain wage so they may have
more money and have a better life. But
this also may have other consequences.

21. - Producing under the market EQ
(not enough)
- Producing over the market EQ
(too much)
Underproduction
Overproduction
Some Vocabulary first…
- is the maximum price sellers are allowed
to charge for a good or service.
Leads to:
Price Ceiling
- is the minimum price buyers are
required to pay for a good or service.
Leads to:
Price Floor

22. Binding - Such as this: 具有约束力的合同
Some Vocabulary first…
- A payment by a government to a
producer to cover part of their costs.
Quota - An upper limit on the quantity of some good that
can be bought or sold.
Subsidy
Price support - Price floor for agricultural goods where the
government guarantees to buy any surplus at that
price.
Price support and Price
floor are the same thing

23. Some Vocabulary first…
Deadweight loss
(DWL)
- Deadweight loss is the loss in total surplus
that occurs whenever an action or a policy
reduces the quantity transacted below the
efficient market equilibrium quantity
(What is lost during market inefficiencies)

24. P
Q
D
S
250 400
shortage
Price
ceiling
500
800
Price Ceiling
- is the maximum
price sellers are
allowed to charge
- also causes
underproduction
Price Controls

25. Housing Market Example:
P
Q
D
S
250 400
Price
ceiling
500
More people want
houses and can
afford them.
But at the lower
price there is not
enough supply.
Now there will be
less houses for
people.
Price Controls

26. P
Q
D
S
150 500
shortage
Price
ceiling
500
800
-- over time
supply and
demand become
more elastic and
shortages
become bigger.
Price Controls
Price Ceiling

27. P
Q
S
D
250 400
Price
ceiling
500
800
- causes EQ to fall,
total surplus to fall.
- causes a
deadweight loss
(DWL)
and not enough
supply to satisfy
demand.
Deadweight
loss
Price Controls
Price Ceiling

28. Problems caused by Price Ceilings:
- Inefficiently low quantity
low prices don’t give the incentive to increase quality.
- Deadweight losses (DWL)
Loss of efficiency in the market.
- Inefficient Allocation to customers
Shortages are caused in the market.
- Wasted resources
Similar to the inefficient allocation.
- Black markets
Do I really have to explain black markets?
Price Ceiling

29. Price Floor
- is the minimum
price buyers are
required to pay
- also causes
overproduction
P
Q
D
S
400 550
Price
floor
5
surplus
Price Controls

30. Another Example Question:
Minimum Wage Example
A minimum wage is the most
commonly used example in any
textbook that shows the potential
damages of a minimum wage.
It’s a good one to show this problem,
but I think not the best because the
evidence is weak and other markets
would show this better, and you have
to switch from thinking as a
consumer of things to being a
supplier of things that is sometimes
confusing at first, but I digress…

31. Here Firms are
Sellers
Here Firms are
Buyers
Here
households are
buyers
Here
households are
sellers

32. W
L
D
S
400 550
Price
floor
5
Notice first this is the market
for labor, not goods like
others so W and L
Supply of workers is
higher, but business are
demanding less workers
because they have to pay
more.
In total it is inefficient and
there are less jobs so now
poor people may be
poorer and lose jobs.
Price Controls
Minimum Wage Example:

33. P
Q
D
S
250 400
Price
floor1200
800
- causes EQ to fall,
total surplus to fall.
- causes a
deadweight loss
(DWL)
and
overproduction
with fewer buyers.
Deadweight
loss
Price Controls
Price Floor

34. Problems caused by Price Floors:
- Inefficiently high quantity
waste of resources, above what consumers will accept.
- Deadweight losses (DWL)
Loss of efficiency in the market.
- Inefficient Allocation sales among sellers
Surpluses are caused in the market.
- Wasted resources
Similar to the inefficient allocation.
- Black markets
Again?
Price Floor

35. {
In combination with other policies
things can become even worse:
Even if those policies are meant to
fix the price control problems.

36. P
Q
D
S
250 400
shortage
Price
ceiling
500
800
S +
Subsidy
Price Controls
Price Ceiling
- is the maximum
price sellers are
allowed to charge
- also causes
underproduction
What if you added a subsidy to
increase Supply to compensate?

37. My Chinese Chicken example of a price
ceiling and a subsidy.
A true story that is
too hard to fully
explain here but had
another cobra effect.

38. Controlling prices is inefficient and
leads to losses.
But what about controlling quantity?
Price Controls
Quantity Controls
Better or worse?

39. Better or worse?

40. An example of
controlling quantity
(quotas)

41. P
Q
D
S
250
Quota
800
Quota
- causes EQ to fall,
total surplus to fall.
- and underproduction
and not enough
buyers are allowed to
participate.
Quantity Controls

42. P
Q
D
S
250
Quota
800 Deadweight
loss
Quota
- causes EQ to fall,
total surplus to fall.
- and underproduction
and not enough
buyers are allowed to
participate.
Quantity Controls

43. P
Q
D
S
250
Quota
800
- causes total
surplus to fall.
- producers
wouldn’t make this
much anyway and it
would not be
binding.
- and overproduction
at too high of a price
for anyone to buy it.
Quota
Quantity Controls

44. P
Q
D
S
250
Quota
800
- causes EQ to fall,
total surplus to fall.
- causes a deadweight
loss (DWL)
And overproduction at
too high of a price for
anyone to buy it.
Deadweight
loss
Quota
Quantity Controls

45. So to summarize…

46. P
Q
S
D
250 400
Price
ceiling
500
800
- causes EQ to fall,
total surplus to fall.
- causes a
deadweight loss
(DWL)
and not enough
supply to satisfy
demand.
Deadweight
loss
Price Controls
Price Ceiling

47. P
Q
D
S
250 400
Price
floor1200
800
- causes EQ to fall,
total surplus to fall.
- causes a
deadweight loss
(DWL)
and
overproduction
with fewer buyers.
Deadweight
loss
Price Controls
Price Floor

48. - A price ceiling pushes the price of a good down.
- A price floor pushes the price of a good up.
- Both floors and ceilings reduce the quantity bought and
sold.
- If sellers don’t want to sell as much as buyers want to
buy, it’s the sellers who determine the actual quantity sold,
because buyers can’t force unwilling sellers to sell and
vice versa.
Price Controls

49. P
Q
D
S
250
Quota
800 Deadweight
loss
Price Controls
Quota
- causes EQ to fall,
total surplus to fall.
- and underproduction
and not enough
buyers are allowed to
participate.

50. Quantity Controls
- A quantity control, or quota, drives a wedge
between the demand price and the supply price of
a good; that is, the price paid by buyers ends up
being higher than that received by sellers.
- It is almost impossible to know what the “correct”
quantity of a good or service should be
Quantity Controls

51. The Cobra Effect
眼镜蛇
The End
Thank you
