Economics
Price Control on Market Structure
Price control refers to government regulations that set maximum or minimum prices for goods and services in the market. These controls can impact the market structure by influencing the behavior of firms, competition levels, and market efficiency. For example, price ceilings can lead to shortages and reduce incentives for firms to produce, while price floors can create surpluses and distort market equilibrium.
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4 Key excerpts on "Price Control on Market Structure"
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.
- Peter Davis, Eliana Garcés, Eliana Garces-Tolon(Authors)
- 2009(Publication Date)
- Princeton University Press(Publisher)
This chapter explores the frameworks which can help competition agencies when they try to identify this effect in practice. Practically all models of competition predict that a change in market structure will have consequences for market prices. Still, empirically assessing the actual relation between structure and price is by no means always an easy activity. Nonetheless, we will see that several empirical strategies can be used to approximate the extent of an increase in prices that will result when concentration occurs. Understanding the underlying theoretical rationale for the relationship between structure and price will be important in order to design an appropriate way of empirically measuring the effect, so we will spend some time describing the basic underlying theory. We then present examples of methodologies that estimate the effects of market structure on price. Our examples are designed to provide practical guidance on appropriate data sets and techniques that could be considered for such analysis and also to point to a number of the potential problems previous investigators have faced when trying to identify the way in which price is likely to change with market structure.Figure 5.1. A two-stage game.Identifying the relationship between price and market structure is hard for a number of reasons. For example, whichever particular methodology we choose, we will need to address the difficult issue of identifying a causal link between market structure and the market outcomes—in particular price. In addition, if we adopt a longer-term perspective, both the number of active firms and the number and type of potential entrants may, on occasion, also constrain pricing power. If so, then in assessing the likely effect of a change of market structure one may also want to evaluate the constraint exerted by potential competitors. These are just two of a large number of potential difficulties analysts in competition agencies often come across. We outline a number of other difficulties below and then go on to describe potential solutions to these problems that the literature has developed.
eBook - PDF- David Besanko, Ronald Braeutigam(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
9 We do not consider consumers to the right of point X on the demand curve because they would not be willing to rent housing at $1,000 even if they could find it. 435 10.2 PRICE CEILINGS AND FLOORS price ceiling with a graph like the one in Case 1 of Figure 10.7, assuming that the good ends up in the hands of consumers with the highest willingness to pay. This assump- tion is reasonable when consumers can easily resell the good to other consumers with a higher willingness to pay, but as Application 10.2 suggests, it may not hold in practice, even though they might not be able to obtain the good when it is initially sold. Before leaving rent controls, we note that government attempts to regulate the price of a commodity rarely work in a straightforward fashion. For example, when a shortage develops in the rental market for housing, some landlords may demand key money, or a fee—an extra payment from a prospective renter—before agreeing to lease an apartment. Although such payments are illegal, they are difficult to moni- tor, and renters who are willing to pay more than the rent-controlled price may will- ingly (though not happily) pay the key money. Landlords may also recognize that with excess demand, they will be able to find renters even if they allow the quality of the apartments to deteriorate. Rent control laws often attempt to specify that the quality should be maintained, but it is quite difficult to write the laws to enforce this intent effectively. Further, landlords may recognize that they would be better off in the long run if they can convert apartments under rent control to other uses not subject to price imposed. Consumers have had difficulty finding foods at regulated prices and have often had to wait in long lines to purchase those foods that were available. In a 2012 survey, powdered milk could not be found in 42 percent of grocery establishments.
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