Floors and Ceilings

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Floors and Ceilings
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• After World War II, many veterans came home and
  immediately decided to start families
• There was a great demand for housing in American
  cities

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• Some local governments decided to impose rent
  control on apartments
• They believed that prices were too high and
  decided to set a maximum price that landlords
  could charge

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• We call that a price ceiling
• The supply of apartments will be very low as
  landlords rebel against the law and realize they
  cant afford to rent at that low price

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• Because of the low price, everyone wants to rent
• Shortage will leave many people without a place
  to live

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• Some American prices are set by government price
  controls
• Imagine that unions appeal to the government for
  higher wages to keep up with cost of living
  increases

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• Because it believes that the minimum wage is too
  low, the government will set a higher one.
• The equilibrium price is too low according to the
  unions, workers, and govt

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• What is the minimum wage right now?

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• They set a new price that is higher than the
  market wants
• It will result in a surplus of workers for the
  available jobs

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• Whenever they are effective, price floors will
  usually result in shortages
• They can be ineffective if the ceiling price is
  set above the equilibrium price or if the floor
  price is set below the equilibrium price

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• If the government wants to use a price ceiling on
  a product, what advice would you give?