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chapter 6

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ECON 1000
Sadia Mariam Malik

Chapter 6 Types of Price Regulations There are two types of price regulations: 1. Price ceiling or price cap:Alegal maximum price - a regulation that makes it illegal to charge a price higher than a specified level. (Primary objective: protect consumers especially low-income groups – Example: Rent ceiling ) 2. price floor:Alegal minimum price - a regulation that makes it illegal to trade at a price lower than a specified level. Primary Objective: Protect producers of a particular good. Example: minimum wage (to protect the producers of labor). Example of Price Ceiling and its Effect AHousing Market with a Rent Ceiling • When a price ceiling is applied to a housing market it is called a rent ceiling. • If the rent ceiling is set above the equilibrium rent, it has no effect. The market works as if there were no ceiling. • But if the rent ceiling is set below the equilibrium rent, it has powerful effects. • At the rent ceiling, the quantity of housing demanded exceeds the quantity supplied. • There is a shortage of housing. • Because the legal price cannot eliminate the shortage, other mechanisms operate: Search activity and Black markets Inefficiency of Rent Ceilings • Arent ceiling set below the equilibrium rent leads to an inefficient underproduction of housing services. •
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