Price Ceilings and Price Floors - Lecture #6 Notes

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19 Apr 2012
Price Ceilings and Price Floors
1) Government intervention in competitive markets is not helpful
2) Unintended consequences occur when government intervenes
The Impact of Price Ceiling
1. Price ceiling, if beneath the market clearing price, creates shortages
2. Principle of voluntary exchange:
Q(P) = minimum [QDP, DSP]
(if QD does not equal QS … shortage)
3. Non-pricing rationing
4. Those able to buy at the price ceiling could resell to other buyers at the “Black
Market” price of $12
Rent Ceiling
Economic concerns with Rent controls
1. Creates shortage
2. Incentive effects
Discourages construction (shortage worsens in long run)
Discourages maintenance
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