ECON 102 Lecture Notes - Lecture 6: Price Ceiling, Price Floor, Price Controls
Document Summary
Government policies that alter the private market outcome. Price ceiling - legal maximum on the price of a good or service. Price floor - legal minimum on the price of a good or service. Government can make buyers or sellers pay a specific amount on each unit bought/sold. Not binding - price ceiling above the equilibrium price, has no effect on the market outcome. Binding constraint - ceiling on the price, causes a shortage. In the long run, supply and demand are more price-elastic. With a shortage, sellers must ration the goods among buyers. Some rationing mechanisms are long lines and discrimination according to sellers" biases. These mechanisms are often unfair, and inefficient, these goods do not necessarily go to the buyers who value them most highly. In contrast, when prices are not controlled the rationing mechanism is efficient and impersonal. Goods go to buyers that value them most highly.