ECON 1116 24 SeptemberPrice Controls- What happens when the market doesn’t operate freely?o Allocation of resources is distortedo Inefficiency- Ex: price controlso Price ceilingo Price floor Assume here that criteria for efficient free market initially holds before price controls imposed Often true, but not always- In cases where price controls create inefficiency, why would the government intervene in the market by imposing such controls?- Efficiency may not be (only) criteria government valueso Equity concerns, etc.- The price flooro Price regulation for market where the equilibrium price would be deemed “too low”o Keeps the price highero “Binding” only if price floor lies above equilibrium priceo Examples: Minimum wage- Difference between labor supply and labor demand is unemployment- Labor supply: workers- Labor demand: firms’ demand for employees- Consumer surplus decreases - Some of the surplus that previously belonged to consumers transferred to producers (labor supply) Agricultural price supports- The price ceilingo Price regulation for market where the equilibrium price would be deemed “too high”o “Binding” only if price ceiling lies below the equilibrium priceo Examples: Rent control- Simple case: illegal to charge more than some maximumrent- Supposed to be a benefit to renters- Price controls prevent prices from adjusting to equilibrium distorts the market- Lesson:o If efficient allocation of resources is the goal;o And if conditions are satisfied that ensure market outcomes are efficient;o Then don’t interfere with the way market prices are determinedECON 1116 24 SeptemberQuantity controls- The quotao Quantity regulation for market where the equilibrium quantity would be deemed “too high”o “Binding" only if quota amount is below equilibrium
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