Economics
Price Ceilings
Price ceilings are government-imposed maximum prices that can be charged for goods and services. They are designed to protect consumers by keeping prices affordable, particularly for essential items. However, price ceilings can lead to shortages and reduce the incentive for producers to supply the goods or services in question.
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7 Key excerpts on "Price Ceilings"
eBook - ePubFoundations of Economics
A Christian View
- Ritenour(Author)
- 2010(Publication Date)
- Wipf and Stock(Publisher)
15 Price Controls I n the previous two chapters we introduced detailed analysis of one facet of government intervention in the economy. We analyzed the nature and consequences of interventionist macroeconomic policy and discovered that neither monetary inflation nor government spending are efficient ways to expand an economy. Macroeconomic policy, however, is only one category of state intervention in the economy. Another common form of intervention is price controls. Price controls are the result of laws regulating prices at which people can legally buy and sell. Rarely do governments force buyers and sellers to accept a single price to make an exchange. Instead governments prefer to set maximum and minimum prices. Price Ceilings The form of price control governments often use in an attempt to thwart the negative consequences of monetary inflation is the price ceiling. As the name implies, a price ceiling is a maximum legal price. If you attempt to throw this textbook up into the air as far as it will go, what will stop it? What is the barrier above which it cannot fly? The ceiling. Just as the ceiling in an indoor room is the highest a thrown object can travel, a price ceiling is the highest price that buyers can legally pay and that sellers can legally accept. There are two types of Price Ceilings: effective and ineffective. We will initially investigate the consequences of an effective price ceiling, but first need to understand what we mean by the words effective and ineffective. Typically, those words are taken to mean that something either works well or does not. In our case, however, the terms refer to whether the price ceiling has an effect on the actual price that buyers pay and sellers receive in an exchange. An effective price ceiling hampers voluntary exchange from negotiating a market price
eBook - PDF- Irvin B. Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
In other markets, the government ’ s goal is to intervene and maintain a price higher than the equilibrium price. Market supply and demand anal-ysis is a valuable tool for understanding what happens when the government fixes prices. There are two types of price controls: Price Ceilings and price floors . EXHIBIT 3 Effect of Shifts in Demand or Supply on Market Equilibrium Change Effect on equilibrium price Effect on equilibrium quantity Demand increases Increases Increases Demand decreases Decreases Decreases Supply increases Decreases Increases Supply decreases Increases Decreases CHAPTER 4 | Markets in Action 103 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 4-2a Price Ceilings Case 1: Rent Controls What happens if the government prevents the price system from setting a market price “ too high ” by mandating a price ceiling ? A price ceiling is a legally established maximum price a seller can charge. Rent controls are an example of the imposition of a price ceiling in the market for rental units. New York City, Washington, D.C., Los Angeles, San Francisco, and other communities in the United States have some form of rent control. Since World War I, rent controls have been widely used in Europe. The rationale for rent controls is to provide an “ essential service ” that would otherwise be unaffordable by many people at the equilibrium rental price. Let ’ s see why most economists believe that rent controls are counterproductive. Exhibit 5 is a supply and demand diagram for the quantity of rental units demanded and supplied per month in a hypothetical city.
eBook - ePub- Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Pratistha Joshi Rajkarnikar, Brian Roach, Mariano Torras(Authors)
- 2022(Publication Date)
- Routledge(Publisher)
The difference between these two curves at any point represents the gap between the maximum WTP of consumers and the production costs of suppliers. Some of this difference is “captured” by producers as profits, and the rest is consumer surplus. As long as the demand curve is above the supply curve, society receives net benefits by producing that unit of a product. However, if the supply curve is above the demand curve, then marginal costs exceed marginal benefits, and society would actually be worse off if that unit were produced and sold. Thus, as long as the demand curve is higher than the supply curve, it makes sense (from the perspective of social welfare) for society to produce each unit, to the point where marginal benefits equal marginal costs. Note in Figure 5.9 that this is true up to the equilibrium quantity of 700 cups of coffee. However, when the supply curve is higher than the demand curve, marginal costs exceed marginal benefits and society should not produce these units. Any production above 700 cups of coffee would decrease social welfare. In other words, the market equilibrium is the outcome that maximizes social welfare. We now test this result by considering what happens when the market is not allowed to reach equilibrium—when a regulation is enacted that sets a price different from the equilibrium price. 4.2 Price Ceilings Sometimes, governments intervene in markets to set price limits, either above or below the market equilibrium price. Somewhat confusingly, a price set below the market price is called a price ceiling (it is a “ceiling” because it establishes a maximum allowable price). price ceiling: a regulation that specifies a maximum price for a particular product Price Ceilings are usually set with the goal of helping certain groups of consumers by keeping prices low. A classic example is rent control, which specifies maximum prices for rental units
eBook - ePubFlaws and Ceilings
Price Controls and the Damage They Cause
- Christopher Coyne, Rachel Coyne, Philip Booth, Ryan Bourne, Stephen Davies, Robert C. B. Miller, Colin Robinson, Steven Schwartz, W. Stanley Siebert, Christopher Snowdon, Richard Wellings(Authors)
- 2015(Publication Date)
- London Publishing Partnership(Publisher)
8. Price Ceilings in financial markets
Philip Booth and Stephen DaviesControls and ceilings on the quantity and cost of credit are probably the oldest form of price control. They are also among the most damaging. Often, as in the Islamic world or classical Greece, the very idea of lending money with interest attached is condemned as unnatural or impious. This was also, of course, the position of early Christians. However, so great is the need for credit in any functioning economy beyond subsistence level that, in practice, lending at interest still happens no matter what the theologians and philosophers may argue. What tends to happen, as with the medieval anti-usury laws, is that a ban on ‘excessive’ interest substitutes for a ban on all interest. In other words, there is a ceiling set on the level of interest that may be charged for a loan. This is quite simply a price cap and, like all such caps, it has economically damaging and disruptive effects.Moreover, because of the central role of money in exchange and in economic activity in general, and given the central place of credit in facilitating growth and innovation, Price Ceilings on credit have impacts that are more extensive and harmful than those imposed on other aspects of economic life. In particular, because for every debtor there is also a creditor, interest rate caps have far reaching impacts on investment returns in general. As well as being a limit on charges to borrowers, they necessarily limit returns to certain kinds of investment and, indirectly, some or most kinds of savings.The most common form of interest ceiling is a cap on the level or amount of interest that can be charged to a borrower. Sometimes, limitations of this kind are imposed in general, on all kinds of loans and credit and on all borrowers, as for example during the Middle Ages in Europe (at least in theory). More often, caps are imposed on specific kinds of loan or credit. In these cases the restrictions are typically applied to credit products that are disproportionately used – or thought to be used – by people on low or irregular incomes. The usual goal of a ceiling on interest is to protect borrowers on low incomes from the consequences of their own lack of financial literacy (i.e. an information asymmetry). However, this intention is usually portrayed as being a matter of protecting low-income borrowers against so-called ‘predatory’ lenders.
eBook - PDF- James D Gwartney, Richard Stroup, J. R. Clark(Authors)
- 2014(Publication Date)
- Academic Press(Publisher)
Shortage: A condition in which the amount of a good offered by sellers is less than the amount demanded by buy-ers at the existing price. An increase in price would elimi-nate the shortage. Price Floor: A legally estab-lished minimum price that buyers must pay for a good or resource. Surplus: A condition in which die amount of a good that sellers are willing to offer is greater than the amount diat buyers will purchase at the existing price. A decline in price would eliminate the surplus. Buyers often believe that prices are too high, and sellers generally perceive prices as too low. Unhappy with the prices established by market forces, individuals sometimes attempt to have prices set by legislative action. Fixing prices seems like a simple, straightforward solution. Simple, straightforward solutions, how-ever, often have unanticipated repercussions. Do not forget the secondary effects. Price Ceilings are often popular during a period of inflation, a situation in which prices of most products are continually rising. Many people mistakenly believe that the rising prices are the cause of the inflation rather than just one of its effects. Exhibit 10a illustrates the impact of fixing a price of a product below its equilibrium level. Of course, the price ceiling does result in a lower price than would result from market forces, at least in the short run. However, that is not the end of the story. At the below-equilibrium price, producers will be unwilling to supply as much as consumers would like to purchase. A shortage (Q, — (7> Exhibit 10a) of the goods will result. A shortage is a situation in which the quantity demanded by consumers exceeds the quantity supplied by producers at the existing price. Unfortunately, fixing the price will not eliminate the rationing problem. Nonprice factors will now become more important in the rationing process. Producers will be more discriminating in their sales to eager buyers.
eBook - PDF- David Stager(Author)
- 2013(Publication Date)
- Butterworth-Heinemann(Publisher)
6. Public and quasi-public goods and services may be provided through direct production by government departments or agencies, by purchasing the goods or services from the private sector, by regu-lating private monopolies, by subsidizing producers, or by imposing taxes on activities that are contrary to the public interest. 7. Governments can use the price mechanism to achieve certain results, for example, by imposing Price Ceilings or price floors and by levying sales taxes or offering subsidies; but governments need to be aware of the consequences of these actions. 8. A price ceiling such as rent control creates an excess demand or shortage; rationing may therefore be used to reduce effective demand. A black market is also likely to arise. 9. A price floor such as a legal minimum wage creates a surplus or excess supply (unemployment). Employers may effectively increase the demand for labour by improving the utilization of labour. There is also an incentive for potential employees to offer their labour services, illegally, below the minimum wage. 10. A sales tax shifts the supply curve upward by the amount of the tax per unit and hence increases the equilibrium price and reduces the quantity sold. The more inelastic the demand and the more elastic the supply, the higher is the new price. The more elastic are both demand and supply, the greater is the reduction in quantity. 11. A subsidy shifts the supply curve downward by the amount per unit of the subsidy, reduces the equilibrium price, and increases the quantity sold. The more inelastic the demand and the more elastic the supply, the lower is the new price and the greater the benefit realized by the consumer.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
This analysis shows that a price ceiling, like a law establishing rent controls, will transfer some producer surplus to consumers—which helps to explain why consumers often favor them. Conversely, a price floor like a guarantee that farmers will receive a certain price for their crops will transfer some consumer surplus to producers, which explains why producers often favor them. However, both price floors and Price Ceilings block some transactions that buyers and sellers would have been willing to make, and creates deadweight loss. Removing such barriers, so that prices and quantities can adjust to their equilibrium level, will increase the economy’s social surplus. Demand and Supply as a Social Adjustment Mechanism The demand and supply model emphasizes that prices are not set only by demand or only by supply, but by the interaction between the two. In 1890, the famous economist Alfred Marshall wrote that asking whether supply or demand determined a price was like arguing “whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper.” The answer is that both blades of the demand and supply scissors are always involved. The adjustments of equilibrium price and quantity in a market-oriented economy often occur without much government direction or oversight. If the coffee crop in Brazil suffers a terrible frost, then the supply curve of coffee shifts to the left and the price of coffee rises. Some people—call them the coffee addicts—continue to drink coffee and pay the higher price. Others switch to tea or soft drinks. No government commission is needed to figure out how to adjust coffee prices, which companies will be allowed to process the remaining supply, which supermarkets in which cities will get how much coffee to sell, or which consumers will ultimately be allowed to drink the brew. Such 70 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col11626/1.10
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