Why would the government step in to control

Why would the government step in to control the prices of goods and services? Would economists think that controlling prices is good idea?

Causes • The government wants to protect groups that have a hard time dealing with price increases. • Keep prices higher or lower than what would be equilibrium.

EFFECT • • Disruption of the market Distort the allocation of resources Does not work. Can work if used for a short period of time.

PRICE CEILING: (Creates a Shortage) • A MAXIMUM price set by the government that consumers are required to pay for a good or service. • Prevents prices from getting too high, enabling consumers to buy essential goods or services they wouldn’t be able to afford at the equilibrium price • Example: Rent control

Persistent Shortage • Demand will increase as price decreases • Result – suppliers don’t want to produce more b/c they can’t set their own prices.

PRICE CEILING Price Ceiling Qs Qd

PRICE FLOOR: (Creates a Surplus) • A MINIMUM price set by the government that consumers are required to pay for a good or service. • Pushes price up, ensuring that producers receive a benefit for providing a good or service • Example: Minimum wage

Persistent surplus • Because price is above equilibrium (law of Demand) tells us that we demand less as price goes up • Result: Sell at low prices or government buys the surplus

PRICE FLOOR Price Floor Qd Qs