Lecture 12Outline of Last Lecture I. Price SystemOutline of Current Lecture II. Price CeilingsCurrent LecturePrice Controls: 1. Price ceilings: makes it illegal for prices to be above a maximum pricea. The price legally charged has to be below the market price, known as the equilibrium price. i. The price cannot go higher than the ceiling. Effects: - Shortages: Quantity demanded is greater than the quantity supplied.o The lower the controlled price, the larger the shortage. o Sellers have more customers than goods- Reduction in qualityo Sellers cannot raise price or else they break the lawo What do they do? They cut the quality.  Ex. Service quality at the gas station is eliminated- Wasteful Lines and search costs: o People now compete against each other to get the good since there are shortageso Some resort to bribing or waiting in line to get their good - Lost gains from trade:o Deadweight Loss: the total cost of consumer and producer surplus when not all mutually profitable gains from trade are exploited. Price ceilings create DWL. - Misallocation of resources:o Ideal: allocate quantity of oil supplied to its highest-value uses Problem? Those potential consumers are legally prevented from signaling their high-value by offering to pay oil suppliers more than the controlled price- Most users have lower-value useso Price controls distort signals and eliminate incentives, this leads to the misallocationo Consumers who value a good the most are prevented from signaling their preferences As a result, goods are misallocated and shortages may benefit the ruling elite - Ex. Rent controlso Price ceiling on rental housingo Landlords cannot raise the rento Larger shortages in the long runo Short run=inelastic ECON 1 1st Editiono Quality?  Landlords don’t provide lawn mowing services, take their time replacing broken things, maintenance low- Benefits of Price controls?o Without it some people wouldn’t be able to afford housing or heaters for the wintero Price controlled economy is called a “command” economyo Find “blats” which are connections  These connections are only possible because of the shortages- Ex. Give me music and I’ll trade you for