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
Observations:
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