RMIT Classification: Trusted
Chapter 6
Price Controls
Copyright © 2021 by W. W. Norton & Company, Inc.
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Price Controls
• Consumer surplus is the difference between what a consumer is
willing to pay and the price paid.
• Producer surplus is the difference between the minimum price a
producer is willing to accept and the price received.
• An outcome is efficient when an allocation of resources maximizes
total surplus.
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Previously—2
• Taxing specific goods leads to a deadweight loss, which reflects
reduced economic activity.
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Big Questions
1. When do price ceilings matter?
2. What effects do price ceilings have on economic activity?
3. When do price floors matter?
4. What effects do price floors have on economic activity?
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Price Controls
• Price Ceiling • Price Floor
❖ Legally set maximum price ❖ Legally set minimum price
❖ Rent control apartment, price ❖ Minimum wage
gouging ❖ Three situations:
❖ Three situations: o Nonbinding
o Nonbinding o Binding
o Binding o Long-run effects
o Long-run effects
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What Are Price Controls?
• Price controls:
❖
• Price ceiling:
❖
• Price floor:
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How to Remember Price Controls
• Look at the ceiling in the classroom. Is it causing you any
problems?
❖ What happens if the ceiling is only 4 feet high?
• Look at the floor. Can you still get to your desk at the current floor
height?
❖ What if the floor was too high?
❖ You would have to change your behavior to reach your desk.
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When Do Price Ceilings Matter?
Let’s start with a simple thought experiment:
• The government imposes a price ceiling on bread of $0.50 per loaf.
• What are some unintended consequences?
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$0.50 Price Ceiling on Bread
Question Explanation In pictures
Will there be more or less
bread for sale ?
Will there be more or less
bread for sale ?
Will the quality change?
Will the opportunity cost of
finding bread change?
Would you buy illegal bread if
you could?
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The Effects of Price Ceilings
• Three different situations:
❖ A nonbinding price ceiling
❖ A binding price ceiling
❖ Long-run effects of price ceiling
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1. Nonbinding Price Ceiling
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2. Binding Price Ceiling
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3. Price Ceilings in the Long Run
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Practice What You Know—1
What will be the effect of a nonbinding price ceiling?
A. A surplus will be created.
B. A shortage will be created.
C. There will be no effect.
D. The effect is unknown.
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Practice What You Know—2
In the event of a binding price ceiling, what is one function that a black
market serves?
A. Reduces the shortage caused by the price ceiling.
B. Decreases the price even further.
C. Creates a monopoly.
D. Causes a surplus of the good.
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What Effects Do Price Ceilings Have
on Economic Activity?
• Two real-world examples: Rent control and price gouging
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Conclusion
• Prices act as signals and give information to consumers and
producers.
• Price controls can distort the signals.
• Price controls lead to unintended consequences.
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