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