Government Price Control Policies and Economic Efficiency

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Government Price Control Policies and Economic
Efficiency

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What we will learn in this class

• Why does the government need price control
  policies?
• Two price control policies price ceiling and
  price floor.
• Impacts of government price control policies on
  market outcomes.
• Lessons that we can learn from government price
  policies.

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Why does the government want to regulate market
prices?

• A competitive market free of government
  regulations is efficient when it is at
  equilibrium.
• However, some suppliers or demanders may not be
  satisfied with the market equilibriums.
• As a result of such dissatisfaction, they may try
  to lobby the government to impose price control
  policies.

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What kind of price control policies the
government may adopt?

• Price ceiling (if demanders win) is a legally
  determined maximum price that sellers may charge.
• Price floor (if suppliers win) is a legally
  determined minimum price that sellers may receive.

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Impacts of government price control policies on
market

• Price ceiling
• Example Rent control
• Price floor
• Example Minimum wage

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Price Ceiling Rent Control in New York City

• It dates back to the housing shortage following
  World War II and generally applies to buildings
  constructed before 1947 in New York City.
• Rent control is intended to protect tenants in
  privately-owned buildings from illegal rent
  increases.

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Price Ceiling Rent Control The Market for
Apartments without Price Ceiling

• Equilibrium without price controls

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Price Ceiling Rent Control The Market for
Apartments with Price Ceiling that is binding

• The eqm price (800) is above the ceiling and
  therefore illegal.
• The ceiling is a binding constraint on the
  price, and causes a shortage.

800
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Effects of A Binding Rent Control

• A binding rent control creates
• a shortage of apartments long waiting lists.
• Non-price rationing more low income families may
  not be able to find an apartment to rent.
• It also encourages Black Market.

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Summary market outcomes of government price
ceiling policy

• Price ceiling reduces market efficiency
  (shortage).
• Non-price rationing.
• In contrast, a competitive equilibrium market
  without price controls is more efficient.

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Price Floor Minimum Wage

• Minimum wage in Pennsylvania has risen to 6.25
  starting Jan. 1, 2007 and will continue to
  increase to 7.15 on July 1, 2007.
• It has been designed to protect those with low
  skills, low education and teenager workers.

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Price Floor Minimum WageUnskilled labor market
without minimum wage

• Eqm w/o price controls

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Price Floor Minimum WageUnskilled labor market
with a binding minimum wage

• The equilibrium wage (6) is below the floor and
  therefore illegal.
• The floor is a binding constraint on the wage,
  and causes a surplus (i.e., unemployment).

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Market Outcomes of A Binding Minimum Wage

• A binding minimum wage creates
• a surplus of unskilled workers. (more
  unemployment).
• non-price rationing employers may discriminate
  certain types of job applicants.
• more labor supply from teenagers people in need
  may end up losing jobs.

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Summary Market outcomes of government price
floor policy

• Price floor reduces market efficiency (surplus).
• Non-price rationing.
• In contrast, the competitive equilibrium market
  without price floor is more efficient.

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Lessons that we can learn from government price
control policies

• Price plays a very crucial role in our economy.
• Controlling price may reduce market efficiency
  and may miss the policy intentions.
• Alternative government policies.

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Tax
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Content

• Tax
• Tax on buyer side
• Tax on seller side
• Applications

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• Importance of tax
• Tax incidence distribution of tax
• When a new tax is imposed, who will pay it?
• Whats the market outcomes?

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When A New Tax Is Imposed on Buyers

• Tax on Cigarettes

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• Step one
• Tax shift demand curve?
• Step two
• How demand curve shifts?
• Step three
• Compare two equilibriums

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• Implications
• If the government levies a tax on buyers
• Taxes reduce quantity of good sold
• Buyers and sellers share the burden of taxes
• Elasticity and tax on buyers

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When A New Tax Is Imposed on Sellers

• Taxes on oil companies
• BP took in 250 billion revenue last year

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• Step one
• A tax will shift supply curve?
• Step two
• How?
• Step three
• Compare two equilibriums

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• Implications
• If the government levies a new tax on sellers
• A new tax will discourage market activities,
  reducing quantity of goods sold.
• Sellers and buyers share the burden of taxes
• Elasticity and tax on sellers