Chapter 5: Price Controls and Quotas - Price Ceilings

Question 1

Why are price controls imposed during crises? (3)

Answer 1

• these events often lead to sudden price increases that hurt many people but produce big gains for a lucky few
• short run vs long run effectds
• wars, harvest failures, natural disasters

Question 2

What are examples of price controls? (5)

Answer 2

• Canadian government imposed ceilings on aluminum, steel, sugar, milk, and many other products during WWII
• rent control
• tuition
• parking passes (cannot resell. set too low)
• price freezes (anti-gauging laws) during disasters

Question 3

Why do price ceilings cause inefficiency? (4)

Answer 3

1. Ineffieciently low quantity (deadweight loss)
2. Inefficient allocation to customers
3. Wasted resources
4. Inefficiently low quality

Question 4

What is deadweight loss?

Answer 4

• the loss in total surplus that occurs whenever an action or policy reduces the quantity transacted below the efficient market equilibrium quantity

Question 5

Deadweight loss graph

Answer 5

Question 6

What is inefficient allocation to customers? (3)

Answer 6

• scarce goods need to be allocated
• if not through monetary exchange, then how?
• so who benefits and loses, and are the people who benefit from a price control the population who was aimed to help?

Question 7

Why do wasted resources cause inefficiency? (2)

Answer 7

• people spend money, time, effort, to cope with the shortages
• the OC of the time spent in lines is the wages not earned, the leisure time not enjoyed (constitutes wasted resources
  ie. USSR bread line where avg wait time for a Soviet woman was 2 hours a day, 7 days a week

Question 8

Why does inefficiently low quality cause inefficiency? (4)

Answer 8

• sellers cannot raise prices
• adjust in two ways: reduce quality, reduce service
• ie. landlords refuse to upgrade, repair
• BLACK MARKETS

Question 9

What are black markets?

Answer 9

• goods or services bought and sold illegally, either because they are prohibited or because the equilibrium price is illegal
• some tenants are willing to bribe landlords

Question 10

What do black markets encourage?

Answer 10

• disrespect for the law in general and worsen the position of those who are honest

Question 11

Are black markets bad?

Answer 11

they can diminish some efficiencies, but in the end, society as a whole is made worse

Question 12

Rent Control Graphs

Answer 12

Question 13

What are examples of price ceiling inefficiencies? (2)

Answer 13

• tuition freezes
• Kidney sales
  see slides 16 and 17

Question 14

So really, why are there price ceilings? (3)

Answer 14

• they do benefit some people (who are typically better organized and more vocal than those who are harmed)
• if the price ceiling has been in effect for a long time, buyers may not have a realistic idea of what would happen without it
• government officials often do not understand supply and demand analysis

Question 15

Is there a better way than price ceilings (2)

Answer 15

• while the policy’s goals may be desirable, we need to ask:
• is the policy achieving the goal?
• is there another way to achieve this goal, one that creates less distortion in the market? (is not as inefficient)