Managing Prices 5.3

Price Ceilings—A government regulation that establishes a maximum price for a particular good or service.– Ex. Affordable housing/ Rent controls

Price Floors—A government regulation that establishes a minimum level for prices.Ex. Agricultural prices

Price Ceiling

Source: Livingeconomics.org

Price Floor

Source: www.flatworldknowledge.com

Consequences of Setting Prices 5.3

Interfering with Supply/Demand can cause unintended consequences and impair equilibrium.Ex. Affordable housing--$600 ceiling/Equilibrium price is $800. – Supply of housing shrinks, Why?

• Profits—Up or down?• New housing supply – Up or down?• Condition of existing rental units?

Rationing 5.3

Rationing– A system in which a government or other institution decides how to distribute a product.Ex. WW II—Tires, sugar, butter, coffeeEx. Cuba today under communism/socialismTicket prices to football games(Supply/Demand)?Ration tickets to students to keep affordableConsequences: Unfair, Expensive, Creates black markets

Consequences of Rationing 5.3

1. Unfairness—Gives special treatment to students, alumni, etc.

2. Cost—Can be costly to implementTakes a lot of hours to track/Hire people.

3. Black Markets—Rationing tends to encourage illegal charging of higher than official prices for an event, product, (Unfair).

(Opportunity for fakes).