Chapter 4 notes - Chapter 4 The market Strikes Back Why...

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Chapter 4: The market Strikes Back Why governments control prices There is often strong political pressure for governments to intervene in markets. Price controls are when a government intervenes to regulate prices. They normally take the form of an upper limit (the price ceiling) or a lower limit (the price floor) Price Ceilings Rent control is the most prevalent form of price ceiling Typically imposed during crisis Modeling a price ceiling Price ceilings have the effect of reducing the available supply since if a manufacturer is unable to sell a good at his desired price…he may produce less of that good, while demand will increase, creating a shortage Note: if a price ceiling is set above the equilibrium cost it will have no effect Why a price ceiling causes inefficiency An inefficient economy is one in which there are missed opportunites…price ceilings encourage these shortages Inefficient Allocation to Consumers Wasted Resources
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