KRUGMAN'SMACROECONOMICS for AP*

8

Margaret Ray and David Anderson

ModuleSupply and Demand: Price Controls (Ceilings and Floors)

What you will learnWhat you will learn

in thisin this ModuleModule::• The meaning of price controls, one

way government intervenes in markets

• How price controls can create problems and make a market inefficient

• Why economists are often deeply skeptical of attempts to intervene in markets

• Who benefits and who loses from price controls, and why they are used despite their well-known problems

• Unpopular market prices

• Political pressure

Why Governments Control PricesWhy Governments Control Prices

• Legal maximum price

• Examples

• Resource prices during WWII

• Oil Prices in1970s

• California electricity

• New York City apartments

Price CeilingsPrice Ceilings

Modeling a Price CeilingModeling a Price Ceiling

How a Price Ceiling Causes How a Price Ceiling Causes InefficiencyInefficiency

• Inefficient Allocation to Consumers

• Wasted Resources

• Inefficiently Low Quality

• Black Markets

So Why Are There Price So Why Are There Price Ceilings?Ceilings?

• Benefit some

• Uncertainty

• Lack of understanding

• Legal minimum price

• Examples

• Agricultural products

• Minimum wage

• Trucking

• Air travel

Price FloorsPrice Floors

Modeling a Price FloorModeling a Price Floor

How a Price Floor Causes How a Price Floor Causes InefficiencyInefficiency

• Inefficiently Low Quantity

• Inefficient Allocation of Sales Among Sellers

• Wasted Resources

• Inefficiently High Quality

• Illegal Activity

So Why Are There Price So Why Are There Price Floors?Floors?

• Benefit some

• Disregard

• Lack of understanding

Figure 8.1 The Market for Apartments in the Absence of Government Controls

Ray and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 8.2 The Effects of a Price CeilingRay and Anderson: Krugman’s Economics for AP, First Edition

Copyright © 2011 by Worth Publishers

Figure 8.3 The Market for Butter in the Absence of Government Controls

Ray and Anderson: Krugman’s Economics for AP, First Edition

Copyright © 2011 by Worth Publishers

Figure 8.4 The Effects of a Price FloorRay and Anderson: Krugman’s Economics for AP, First Edition

Copyright © 2011 by Worth Publishers