Question

You are an economic analyst and have been asked to go on television and provide an analysis of what happenswhen a price ceiling is imposed on an item. I assume that you will have read notes on price ceiling and viewed the tutorial and or the marginal revolution price ceiling videos before doing this assignment So basically what you are submitting here is your "script" Make sure to cover 4 consequences. Be creative!

Answer 1

A price ceiling occurs when the government puts a legal limit on how high the price of a product can be. In order for a price ceiling to be effective, it must be set below the natural market equilibrium.

When a price ceiling is set, a shortage occurs. For the price that the ceiling is set at, there is more demand than there is at the equilibrium price. There is also less supply than there is at the equilibrium price, thus there is more quantity demanded than quantity supplied. An inefficiency occurs since at the price ceiling quantity supplied the marginal benefit exceeds the marginal cost. This inefficiency is equal to the deadweight welfare loss.

Recent increases in the price of gas have left many individuals asking for a price ceiling on gas. You now see why this is a bad idea. If the government sets a price ceiling on gas, there will be a shortage.

If a price ceiling is set, then there must be a way to assign who gets the low supply of the product. Of course, since there is a legal limit on the price, the price can't simply be raised. There are several ways this is done without raising the price:

• Lottery: One way to distribute a product for which there is a shortage is to draw names out of a hat. In some states there is a high demand to be able to hunt for moose, but the government has a limit on the amount of permits it gives out. Often these states have a lottery and if you are lucky enough to get drawn, you can try your luck at finding and shooting a moose during the season.
• Black Market: For those lucky enough to get some of the short supply, they are often better off selling what they have obtained to the demanders that will get more benefit out of it. In some cities there have been ceilings put on the apartment rent. While the demand for apartments increases, the rent remains the same. When some renters are ready to move, they sublease their apartment instead of ending their contract. If they were renting for $500, but someone is willing to pay $1000, then the subleaser can continue paying $500 and pocket the extra $500 he gets from the subleasee.
• Queue/First Come First Serve: Had they raised the price of tickets to $100 the opening night of Star Wars: Episode I, I wouldn't have been willing to camp out two nights to get a ticket. Since they didn't let the market determine the price, however, there was a huge line and those that were there first got to buy tickets. Of course, in this case they may have wanted the "buzz" that would come from having people camp out a week early just to get tickets, but there are other cases where a buzz isn't useful.
• Historical Use: Sometimes the government will allow the consumers that were already consuming to continue consuming. This would be hard to do since after the price ceiling there will be many more people claiming they have consumed in the past. Also, the quantity supplied is decreased which will even leave some of the historical consumers wanting.

Price ceilings do not simply benefit renters at the expense of landlords. Rather, some renters (or potential renters) lose their housing as landlords convert apartments to co-ops and condos. Even when the housing remains in the rental market, landlords tend to spend less on maintenance and on essentials like heating, cooling, hot water, and lighting. The first rule of economics is you do not get something for nothing—everything has an opportunity cost. So if renters get “cheaper” housing than the market requires, they tend to also end up with lower quality housing.

Price ceilings have been proposed for other products. For example, price ceilings to limit what producers can charge have been proposed in recent years for prescription drugs, doctor and hospital fees, the charges made by some automatic teller bank machines, and auto insurance rates. Price ceilings are enacted in an attempt to keep prices low for those who demand the product. But when the market price is not allowed to rise to the equilibrium level, quantity demanded exceeds quantity supplied, and thus a shortage occurs. Those who manage to purchase the product at the lower price given by the price ceiling will benefit, but sellers of the product will suffer, along with those who are not able to purchase the product at all. Quality is also likely to deteriorate.