Government Imposed Price Controls In Competitive Markets: Buyers compete with other buyers Sellers compete with other sellers Buyers who most want the product get it Sellers who are most efficient at making ice cream are the ones who sell it Perfect Right? NOT TO EVERYONE What about when the market prices are too low? Price Control What could the government do to help out dairy farmers, besides buying the surplus cheese? Create a price floor , a legally enforced minimum price for a product Price floors are set above the equilibrium price Minimum Wage is a Price Floor This is a generic budget that McDonald’s designed for its adult workers. Your text here Write down your thoughts about living on this budget. Could you do it? Is it missing anything that you need? Price Floor: Minimum Wage Graph this: The equilibrium price of wages is $7.25 an hour The government raises minimum wage to $10.10 an hour What happens? Price Floor What market condition does a price floor create? Surplus What about when the market prices are too high? Let’s look at rent prices in Johnson City, TN Let’s look at rent prices in Boston, Massachusetts When Prices are Too High What could the government do to help out Boston renters? The government can create a price ceiling, a legally enforced maximum price that can be charged for a good or a service Price ceilings are below the equilibrium price Price Ceiling: Rent Control Graph this: Equilibrium quantity of renting an apartment Equilibrium price is $900 The price ceiling for gas is $750 What is the result? Price Ceiling Cont. What market condition does a price ceiling create? Shortage Why? Because the price is set below the equilibrium, thus there is more demand and less supply “We economists don't know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can't sell tomatoes for more than two cents per pound. Instantly you'll have a tomato shortage. It's the same with oil or gas.” Milton Friedman If Price Controls Create Shortages and Surpluses, Then Why Do They Become Laws? They sound like a good idea to the public Politicians want to keep their constituents happy Special interest groups push for them Think of it as an upside down house ---- you can’t go above the ceiling and you can’t go below the floor.