{Government intervention in the markets

Price Controls

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Saint Thomas Aquinas, (1225 – 7 March 1274)

Thomas is held in the Catholic Church to be the model teacher for those studying for the priesthood, and indeed the highest expression of both natural reason 自然的逻辑 and speculative theology 投机神学 .

So, he and others asked this question…

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What is an ethical price?合乎道德的

Hurricane 飓风2012 Hurricane Sandy

New York, modern day example

Lots of homes are destroyed and services and gas supplies have been cut and there is not enough for the people.

The governor of New York has a job to help people

Gave away free gasoline to help people 免费汽油

is that ethical?合乎道德的

The governor of New Jersey has a job to help people

People only pay a little more, and gas rationing 汽油配给

is that ethical?合乎道德的

Outcome of these policies is long lines for gas with many people going without it.

And those that got their first…

Hoarding囤积居奇

Price gouging价格欺诈

This led to the emergency services couldn’t get the supply they needed

Free and rationed gas didn’t lead to MORE gas (the real problem) and those that really needed it didn’t get it.

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What is an ethical price?合乎道德的What seems ethical might not be. What do you see? What do you not see?

If you control the price, do you make things better or worse?

The Cobra Effect 眼镜蛇Sometimes actions lead to unintended consequences called this.

Free toll roads during 国庆节

Better or worse?

{Government intervention in the markets

Price Controls

An Example Question:

Price Controls

You are the mayor 市长 of a major city like Shanghai. The price of apartments in your city is extremely high and many people cannot afford it. You want to help the people out and make housing more affordable for the people. What do you do?

One thing you can do is lower the price allowed for people to sell their apartments so more people can afford the lower price. However this may have unforeseen consequences.

Another Example Question:

Price ControlsYou are a the mayor 市长 in Shanghai.

Your city has many workers that work in factories that make a very poor wage that is not enough for them to live a decent life. Food prices are high, housing prices are high and the wage they get is barely enough to eat and survive, how can you help these people?

Perhaps you can institute a minimum wage that makes it so they have to be paid at least a certain wage so they may have more money and have a better life. But this also may have other consequences.

- Producing under the market EQ (not enough)

- Producing over the market EQ(too much)

Underproduction

Overproduction

Some Vocabulary first…

- is the maximum price sellers are allowed to charge for a good or service.

Leads to:

Price Ceiling

- is the minimum price buyers are required to pay for a good or service.

Leads to:

Price Floor

Binding - Such as this: 具有约束力的合同

Some Vocabulary first…

- A payment by a government to a producer to cover part of their costs.

Quota - An upper limit on the quantity of some good that can be bought or sold.

Subsidy

Price support

- Price floor for agricultural goods where the government guarantees to buy any surplus at that price.

Price support and Price floor are the same thing

Some Vocabulary first…

Deadweight loss(DWL)

- Deadweight loss is the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity

(What is lost during market inefficiencies)

P

QD

S

250 400

shortage

Price ceiling500

800

Price Ceiling- is the maximum

price sellers are allowed to charge

- also causes underproduction

Price Controls

Housing Market Example:

P

QD

S

250 400

Price ceiling500

More people want houses and can afford them.

But at the lower price there is not enough supply.

Now there will be less houses for people.

Price Controls

P

QD

S

150 500

shortage

Price ceiling500

800-- over time supply and demand become more elastic and shortages become bigger.

Price ControlsPrice Ceiling

P

Q

S

D250 400

Price ceiling500

800

- causes EQ to fall, total surplus to fall.

- causes a deadweight loss (DWL)and not enough supply to satisfy demand.

Deadweight loss

Price ControlsPrice Ceiling

Problems caused by Price Ceilings:- Inefficiently low quantity

low prices don’t give the incentive to increase quality.- Deadweight losses (DWL)

Loss of efficiency in the market.- Inefficient Allocation to customers

Shortages are caused in the market.- Wasted resources

Similar to the inefficient allocation.- Black markets

Do I really have to explain black markets?

Price Ceiling

Price Floor

- is the minimum price buyers are required to pay

- also causes overproduction

P

QD

S

400 550

Price floor5

surplus

Price Controls

Another Example Question:

Minimum Wage Example

A minimum wage is the most commonly used example in any textbook that shows the potential damages of a minimum wage.It’s a good one to show this

problem, but I think not the best because the evidence is weak and other markets would show this better, and you have to switch from thinking as a consumer of things to being a supplier of things that is sometimes confusing at first, but I digress…

Here Firms are Sellers

Here Firms are Buyers

Here households are buyers

Here households are sellers

W

LD

S

400 550

Price floor5

Notice first this is the market for labor, not goods like others so W and L

Supply of workers is higher, but business are demanding less workers because they have to pay more.

In total it is inefficient and there are less jobs so now poor people may be poorer and lose jobs.

Price ControlsMinimum Wage Example:

P

QD

S

250 400

Price floor1200

800

- causes EQ to fall, total surplus to fall.

- causes a deadweight loss(DWL) and overproduction with fewer buyers.

Deadweight loss

Price ControlsPrice Floor

Problems caused by Price Floors:- Inefficiently high quantity

waste of resources, above what consumers will accept.- Deadweight losses (DWL)

Loss of efficiency in the market.- Inefficient Allocation sales among sellers

Surpluses are caused in the market.- Wasted resources

Similar to the inefficient allocation.- Black markets

Again?

Price Floor

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In combination with other policies things can become even worse:Even if those policies are meant to fix the price control problems.

P

QD

S

250 400

shortage

Price ceiling500

800

S + Subsidy

Price ControlsPrice Ceiling- is the maximum

price sellers are allowed to charge

- also causes underproduction

What if you added a subsidy to increase Supply to compensate?

My Chinese Chicken example of a price ceiling and a subsidy.

A true story that is too hard to fully explain here but had another cobra effect.

Controlling prices is inefficient and leads to losses.

But what about controlling quantity?

Price Controls

Quantity Controls

Better or worse?

Better or worse?

An example of controlling quantity (quotas)

P

QD

S

250

Quota

800

Quota- causes EQ to fall, total surplus to fall.

- and underproduction and not enough buyers are allowed to participate.

Quantity Controls

P

QD

S

250

Quota

800 Deadweight loss

Quota- causes EQ to fall, total surplus to fall.

- and underproduction and not enough buyers are allowed to participate.

Quantity Controls

P

QD

S

250

Quota

800

- causes total surplus to fall. - producers wouldn’t make this much anyway and it would not be binding.

- and overproduction at too high of a price for anyone to buy it.

Quota

Quantity Controls

P

QD

S

250

Quota

800

- causes EQ to fall, total surplus to fall.

- causes a deadweight loss (DWL) And overproduction at too high of a price for anyone to buy it.

Deadweight loss

Quota

Quantity Controls

So to summarize…

P

Q

S

D250 400

Price ceiling500

800

- causes EQ to fall, total surplus to fall.

- causes a deadweight loss (DWL)and not enough supply to satisfy demand.

Deadweight loss

Price ControlsPrice Ceiling

P

QD

S

250 400

Price floor1200

800

- causes EQ to fall, total surplus to fall.

- causes a deadweight loss(DWL) and overproduction with fewer buyers.

Deadweight loss

Price ControlsPrice Floor

- A price ceiling pushes the price of a good down.

- A price floor pushes the price of a good up.

- Both floors and ceilings reduce the quantity bought and sold.

- If sellers don’t want to sell as much as buyers want to buy, it’s the sellers who determine the actual quantity sold, because buyers can’t force unwilling sellers to sell and vice versa.

Price Controls

P

QD

S

250

Quota

800 Deadweight loss

Price ControlsQuota

- causes EQ to fall, total surplus to fall.

- and underproduction and not enough buyers are allowed to participate.

Quantity Controls

- A quantity control, or quota, drives a wedge between the demand price and the supply price of a good; that is, the price paid by buyers ends up being higher than that received by sellers.

- It is almost impossible to know what the “correct” quantity of a good or service should be

Quantity Controls

The Cobra Effect 眼镜蛇The EndThank you