3250:200 Lecture Notes - Lecture 6: Price Ceiling, Economic Equilibrium
Document Summary
Has no effect on the market outcome binding constraint- the equilibrium price is above the ceiling and is therefore illegal. In the long run, supply and demand are more price elastic, so the shortage is larger. With a shortage, sellers must ration the goods among buyers rationing mechanisms- long lines, discrimination according to sellers" biases. These mechanisms are often unfair and inef cient : the goods do not necessarily go to buyers who value them most highly. In contrast, when prices are not controlled, the rationing mechanism is ef cient (the goods go to the buyers that value them most highly) and impersonal (and thus fair) Markets are usually a good way to organize economic activity. Prices are the signals that guide the allocation of society"s resources. This allocation is altered when policymakers restrict prices. Price controls often intended to help the poor, but often hurt more than help.