ECON 2006 Lecture Notes - Lecture 4: Deadweight Loss, Price Controls, Economic Equilibrium
Document Summary
Interference in markets has consequences: distorted price signals cause resources to be misallocated. If prices are distorted, they cannot give good information to buyers and sellers. Price controls: price controls legal restrictions on how high or low a market price may go. There are two main types: price ceiling a maximum price sellers can charge for a good or service (usually set. Below equilibrium: price floor a minimum price buyers are required to pay for a good or service (usually set above equilibrium) How price ceilings cause inefficiency: price ceilings cause predictable side effects: If a price ceiling is set above equilibrium, it will have no effect (called nonbinding: only a price ceiling that forces price below equilibrium will have any effect (called binding or effective) Inefficiently low quantity: when prices are held below the market price, shortages are created, the lower the controlled price relative to the market equilibrium price, the larger the shortage.
