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Market Disequilibrium
Price Ceilings and Price Floors cause market disequilibrium because they disrupt the natural dynamics of the marketplace (supply and demand)
Price Ceiling A legal maximum on the price at which a good can be sold.
(if government feels that the price for a good or service is too high)
Examples: Rent Control for apartments Electricity (NS Power)…Monopoly
PROS (Purpose)
- Help the poor by making housing more affordable
- Prevent prices from becoming unreasonably high…especially in cases of Monopolies
CONS
- Landlords cannot keep up with rising costs of maintenance. (which have not been frozen)
- Market inefficiency (shortages)
Case A No Point in having a price
ceiling.
Therefore, it is important to know where the equilibrium
point is before a price ceiling is established…
Case B Typical Price Ceiling Scenario
Example – Gasoline Prices.
An increase in the price of crude oil – shifts the supply curve of gasoline to the left in case (b). This results in a shortage of gasoline (excess demand)…causing motorists to wait for
hours to buy only a few gallons of gas.
Price Floor
A legal minimum on the price at which a good or service can be sold.
Very common example: Minimum Wages
PROS (Purpose)
- Help reduce the amount of poverty and raise living standards (avoid sweatshop conditions)
- Help people keep up with the rise of inflation (they raise it from time to time)
CONS
- Disrupt market equilibrium (surpluses)
- Increases unemployment
Price Floor - Surpluses
http://www.youtube.com/watch?v=zjXwvQz7f2o
Benefits the producers.