Micro 16: Price controls Flashcards
What are price controls?
Explain and illustrate the impact of a maximum price control on a market
They’re used where the price of the market is deemed too high by the government (price ceiling)
By imposing a price ceiling below that equilibrium price, they’re promoting equity, encouraging more consumption of essential goods and services, eg. maximum prices for rented accommodations in NYC and Berlin
Lower prices means extension of demand so more consumption and equity
Solving market failure and inequality
BUT:
-Shortage- will be created as there’s an extension of demand but also contraction of supply, government creates a shortage where there are no problems for those who can find rented accom at Pmax but from Q2-QD, these people are willing and able to buy it at that lower price but don’t get the supply, they’re within the excess demand so pure government failure
-Black markets- they’re likely to go here, landlords are willing to offer accom at a slightly higher price than Pmax, many of those within excess demand who are happy to pay that so exploited by landlords in black market, eg. poor quality and high prices. Contraction of supply is bad because we want producers building more luxury apartments not cheaper rented accom knowing the price is low which will only drive out more lower income households. If prices are lower, so is quality offered by landlords.
-Enforcement- needs to happen to ensure landlords aren’t charging prices beyond Pmax, big issue in Berlin
-Setting price at right level- too low then massive excess of demand, if too high (close to equilibrium) then no promotion of equity and greater consumption
-Costs- if governments want to increase supply to equal Qd as not happy with shortage, can subsidise private landlords, build their own property which is very costly, big opportunity cost, large government failure as dealing with inefficiencies they’ve caused
