price and quality controls. price controls legal restrictions on how high or low a market may go...

Price and Quality ControlsPrice and Quality Controls

Price ControlsPrice Controls

• Legal restrictions on how high or low a Legal restrictions on how high or low a market may gomarket may go

• Price Ceilings is the maximum price Price Ceilings is the maximum price sellers are allowed to charge for a good sellers are allowed to charge for a good or serviceor service

• Price Floor is the minimum price buyers Price Floor is the minimum price buyers are required to pay for a good or serviceare required to pay for a good or service

Price CeilingsPrice Ceilings• Typically imposed during a crisis because Typically imposed during a crisis because

these events often lead to sudden price these events often lead to sudden price increases that hurt many people but increases that hurt many people but benefit a fewbenefit a few

• Ex. WWII – aluminum and steel in demand Ex. WWII – aluminum and steel in demand for the war and price controls were in for the war and price controls were in place to avoid a few earning large profitsplace to avoid a few earning large profits

• Ex. Oil embargo in 1973, rent controlsEx. Oil embargo in 1973, rent controls

The Market for Apartments in the Absence of The Market for Apartments in the Absence of Government ControlsGovernment Controls

1.6 1.70 1.8 1.9 2.0 2.22.1 2.3 2.4

$1,400

1,300

1,200

1,100

1,000

900

800

700

600

Quantity of apartments (millions)

Monthly rent (per apartment)

D

E

S

$1,4001,3001,2001,1001,000

900800700600

2.42.32.22.12.01.91.81.71.6

1.61.71.81.92.02.12.22.32.4

Quantity supplied

Quantity demanded


Quantity of apartments(millions)

The Effects of a Price CeilingThe Effects of a Price Ceiling

1.60 1.8 2.0 2.2 2.4

$1,400

1,200

1,000

800

600


Monthly rent(per apartment)

D

S

E

BA

Housing shortageof 400,000 apartmentscaused byprice ceiling

Price ceiling

Effects of Price CeilingsEffects of Price Ceilings

• Don’t always cause a shortageDon’t always cause a shortage• If a price ceiling is set above the If a price ceiling is set above the

equilibrium price, it won’t have any equilibrium price, it won’t have any effecteffect• But sometimes price ceilings can But sometimes price ceilings can

cause inefficiencycause inefficiency

How Price Ceilings Cause InefficiencyHow Price Ceilings Cause Inefficiency

The effects of Rent Controls:The effects of Rent Controls:1.1. Reduces the quantity of apartments rented Reduces the quantity of apartments rented

below the efficient levelbelow the efficient level2.2. Leads to misallocation of apartments among Leads to misallocation of apartments among

would-be renterswould-be renters3.3. Leads to wasted time and effort as people Leads to wasted time and effort as people

search for apartmentssearch for apartments4.4. Leads to landlords maintaining apartments Leads to landlords maintaining apartments

in inefficiently low quality or conditionsin inefficiently low quality or conditions


• Rent controls reduce the number of Rent controls reduce the number of apartments supplied and they apartments supplied and they reduce the number of apartment reduce the number of apartment rentedrented

A Price Ceiling Causes Inefficiently Low A Price Ceiling Causes Inefficiently Low QuantityQuantity

1.60 1.8 2.0 2.2 2.4

$1,400

1,200

1,000

800

600



D

S

E

Price ceiling

Quantity supplied with rent control

Quantity supplied without rent control

Deadweight Deadweight Loss is the loss Loss is the loss in total surplus in total surplus

that occurs that occurs whenever an whenever an

action or a action or a policy reduces policy reduces the quantity the quantity transacted transacted below the below the

efficient market efficient market equilibrium equilibrium

quantityquantity.

Deadweight LossDeadweight Loss

• Key concept in economicsKey concept in economics• Occurs whenever an action or a policy leads Occurs whenever an action or a policy leads

to a reduction in the quantity transacted to a reduction in the quantity transacted below the efficient market equilibrium below the efficient market equilibrium quantityquantity

• Deadweight loss is a loss to society – a Deadweight loss is a loss to society – a reduction in the total surplus, a loss in reduction in the total surplus, a loss in surplus that accrues to no one as a gainsurplus that accrues to no one as a gain

Not the same as a loss in surplus

Not the same as a loss in surplus

to one person that then accrues

to one person that then accrues

as a gain to someone else – that

as a gain to someone else – that

is a transfer of surplus

is a transfer of surplus

Price Ceilings Causing Inefficient Price Ceilings Causing Inefficient Allocation to ConsumersAllocation to Consumers

• 2.2 million people wanted to rent an apartment at 2.2 million people wanted to rent an apartment at $800 month$800 month

• Only 1.8 million apartments are availableOnly 1.8 million apartments are available• Of the 2.2 million people, Of the 2.2 million people,

– some want an apartment so bad they will pay anythingsome want an apartment so bad they will pay anything– Some are only willing to pay a low price and will wait for Some are only willing to pay a low price and will wait for

one to be availableone to be available

• An efficient allocation of apartments would reflect An efficient allocation of apartments would reflect these differences, one who wants one urgently will these differences, one who wants one urgently will get one and people who can wait will not get one get one and people who can wait will not get one BUT….this does not happenBUT….this does not happen

Inefficient Allocation to Inefficient Allocation to ConsumersConsumers

• Instead, in an inefficient distribution Instead, in an inefficient distribution of apartments, people who aren’t in of apartments, people who aren’t in a hurry will get one and those who a hurry will get one and those who are, won’t.are, won’t.

WHY????WHY????

Price Ceilings Causing Wasted Price Ceilings Causing Wasted ResourcesResources

• Price ceilings typically lead to inefficiency in Price ceilings typically lead to inefficiency in of wasted resourcesof wasted resources

• People expend money, effort, and time to People expend money, effort, and time to cope with the shortages caused by the price cope with the shortages caused by the price ceilingceiling

• Ex. 1979, price controls on gasolineEx. 1979, price controls on gasoline– Lead to shortages that forced many to spend Lead to shortages that forced many to spend

hours each week waiting in lines and missing out hours each week waiting in lines and missing out on wages and leisure time – opportunity coston wages and leisure time – opportunity cost

Price Ceilings Causing Goods to be Price Ceilings Causing Goods to be of Low Qualityof Low Quality

• Sellers offer low-quality goods at a low Sellers offer low-quality goods at a low price even though buyers would rather price even though buyers would rather have higher quality and are willing to have higher quality and are willing to pay for itpay for it

Price Ceilings Causing Illegal Price Ceilings Causing Illegal ActivitiesActivities

• Price Ceilings can lead to goods being Price Ceilings can lead to goods being bought and sold illegallybought and sold illegally

• Black Markets are a market in which Black Markets are a market in which goods or services are bought and sold goods or services are bought and sold illegally – either because it is illegal to illegally – either because it is illegal to sell that at all or because the prices sell that at all or because the prices charged are legally prohibited by a price charged are legally prohibited by a price ceilingsceilings

Why are there Price Ceilings?Why are there Price Ceilings?

1.1. They do benefit some peopleThey do benefit some people2.2. Buyers may not even know the goods Buyers may not even know the goods

they are using/buying have price they are using/buying have price controlscontrols

3.3. And (according to textbooks and And (according to textbooks and economists) government officials do not economists) government officials do not understand supply and demand analysisunderstand supply and demand analysis

Price FloorsPrice Floors

• Government intervention to push Government intervention to push market prices up instead of downmarket prices up instead of down

• Minimum Wage is a legal floor on the Minimum Wage is a legal floor on the wage rate which is the price of laborwage rate which is the price of labor

The Market for Butter in the Absence The Market for Butter in the Absence of Government Controlsof Government Controls

$1.40$1.30$1.20$1.10$1.00$0.90$0.80$0.70$0.60

14.013.012.011.010.09.08.07.06.0

8.08.59.09.5

10.010.511.011.512.0

Quantity of butter(millions of pounds)

Price of butter(per pound)

Quantity supplied

Quantity demande

d

Quantity of butter (millions of pounds)

6 70 8 9 10 11 1312 14

$1.40

1.30

1.20

1.10

1.00

0.90

0.80

0.70

0.60

Price of butter (per pound)

D

S

E

The Effects of a Price FloorThe Effects of a Price Floor

60 8 9 10 12 14

$1.40

1.20

1.00

0.80

0.60 D

S

E

BA

Butter surplus of 3 million pounds caused by price floor

Price floor



Effects of a Price FloorEffects of a Price Floor

• Price floors do not always lead to an Price floors do not always lead to an unwanted surplusunwanted surplus

• Some price floors are irrelevantSome price floors are irrelevant• If a price floor is binding (permanent) If a price floor is binding (permanent)

what happens to the unwanted surplus?what happens to the unwanted surplus?

Price Floors Causes Low QuantityPrice Floors Causes Low Quantity

• Price floors raise the price of a good to Price floors raise the price of a good to consumersconsumers

• Price floors also reduce the quantity of that Price floors also reduce the quantity of that good demanded – sellers can’t sell more good demanded – sellers can’t sell more units of a good than buyers are willing to payunits of a good than buyers are willing to pay

• Price floors reduces the quantity of a good Price floors reduces the quantity of a good bought and sold below the market bought and sold below the market equilibrium quantity and leads to a equilibrium quantity and leads to a deadweight lossdeadweight loss

A Price Floor Causes Inefficiently Low QuantityA Price Floor Causes Inefficiently Low Quantity

60 8 9 10 12 14

$1.40

1.20

1.00

0.80

0.60 D

S

E

Quantity demanded with price floor

Quantity demanded without price floor

Deadweight loss

Price floor



Price Floors Causes Inefficient Price Floors Causes Inefficient Allocation of Sales Among SellersAllocation of Sales Among Sellers• Price ceilings can lead to inefficient Price ceilings can lead to inefficient

allocation allocation • Price floors can cause inefficient Price floors can cause inefficient

allocation of sales among sellers – those allocation of sales among sellers – those who would be willing to sell the good at who would be willing to sell the good at the lowest price are not always those the lowest price are not always those who actually manage to sell itwho actually manage to sell it

Price Floors Cause Wasted Price Floors Cause Wasted ResourcesResources

• Government purchasing of unwanted Government purchasing of unwanted surplus of agricultural productssurplus of agricultural products

• Surplus is destroyed or it is stored and Surplus is destroyed or it is stored and will go bad eventuallywill go bad eventually

• Price floors also lead to wasted time Price floors also lead to wasted time and effortand effort–Minimum wage jobsMinimum wage jobs

Price Floors Cause Inefficiency in Price Floors Cause Inefficiency in the Quality of Goods Producedthe Quality of Goods Produced

• Sellers offer high-quality goods at a high Sellers offer high-quality goods at a high price, even though buyers would prefer price, even though buyers would prefer a low quality at a lower pricea low quality at a lower price

• People want quality but only if it is People want quality but only if it is worth the priceworth the price

Price Floors Cause Illegal ActivityPrice Floors Cause Illegal Activity

• Price floors cause incentives for illegal Price floors cause incentives for illegal activityactivity

• Working off the books for employersWorking off the books for employers

• Bribing Government InspectorsBribing Government Inspectors

Controlling QuantitiesControlling Quantities

• Quantity control (quota) is an upper Quantity control (quota) is an upper limit on the quantity of some good that limit on the quantity of some good that can be bought or sold.can be bought or sold.

• Ex. Taxi MedallionsEx. Taxi Medallions


• The total amount of the good than can The total amount of the good than can be transacted under the quantity be transacted under the quantity control is a quota limitcontrol is a quota limit

• Controlling quantity is done though a Controlling quantity is done though a license, an owner is given the right to license, an owner is given the right to supply a goodsupply a good

The Market for Taxi Rides in the The Market for Taxi Rides in the Absence of Government ControlsAbsence of Government Controls

6 7 90 8 10 11 1312 14

$7.00

6.50

6.00

5.50

5.00

4.50

4.00

3.50

3.00 D

S

E

Quantity of rides (millions per year)

Fare (per ride)

$7.00

$6.50

$6.00

$5.50

$5.00

$4.50

$4.00

$3.50

$3.00

14

13

12

11

10

9

8

7

6

6

7

8

9

10

11

12

13

14

Quantity of rides(millions per year)

Fare(per ride)

Quantity supplied

Quantity demanded

Demand Price – a given quantity is the price at which consumers

will demand that quantity

Supply Price – a given quantity is the price at which producers will

supply that quantity

Controlling QuotasControlling Quotas

• NYC limits the quantity of taxi rides to 8 NYC limits the quantity of taxi rides to 8 million per year (assumption for analysis)million per year (assumption for analysis)

• Medallions are available to selected Medallions are available to selected drivers for a total of 8 million ridesdrivers for a total of 8 million rides

• Medallion holders can drive their own Medallion holders can drive their own taxi or rent their medallions to others taxi or rent their medallions to others for a feefor a fee

Effect of a Quota on the Market for Taxi RidesEffect of a Quota on the Market for Taxi Rides

$7.00

$6.50

$6.00

$5.50

$5.00

$4.50

$4.00

$3.50

$3.00

14

13

12

11

10

9

8

7

6

6

7

8

9

10

11

12

13

14


Fare(per ride)

Quantity supplied

Quantity demande

d

A

B

6 70 8 9 10 11 12 13 14

$7.00

6.50

6.00

5.50

5.00

4.50

4.00

3.50

3.00 D

S

E

Deadweight loss

The “wedge”

Quota


Fare (per ride)


• How can the price received (quantity How can the price received (quantity supplied) be different from the price paid supplied) be different from the price paid (quantity demanded)?(quantity demanded)?

• Two transactions and thus two pricesTwo transactions and thus two prices1.1.The transactions in taxi rides and the price at The transactions in taxi rides and the price at

which these occurwhich these occur2.2.The transaction of medallions and the price The transaction of medallions and the price

at which these occurat which these occur

Controlling QuotasControlling Quotas• In every case at which the supply of goods is legallyIn every case at which the supply of goods is legallyresticted there is a wedgeresticted there is a wedge• A wedge between the A wedge between the demand price of the quantity demand price of the quantity transacted and the supply pricetransacted and the supply priceof the quantity transactedof the quantity transacted• This line represents the This line represents the quota rent which is the quota rent which is the earnings that accrue to the license-holder fromearnings that accrue to the license-holder fromownership of the right to sell the good. It is equal toownership of the right to sell the good. It is equal tothe market price of the license when the license arethe market price of the license when the license aretradedtraded

Quantity Controls Side EffectsQuantity Controls Side Effects

1.1. Deadweight loss because some Deadweight loss because some mutually beneficial transactions don’t mutually beneficial transactions don’t occuroccur

2.2. Incentives for illegal activitiesIncentives for illegal activities

Price and Quality Controls Price and Quality Controls NotesNotes

Price ControlsPrice Controls

• Legal restrictions on how high or low a Legal restrictions on how high or low a market may gomarket may go

• Price Ceilings Price Ceilings isis

• Price Floor Price Floor isis

Price CeilingsPrice Ceilings• Typically imposed during a crisis Typically imposed during a crisis

because these events often lead to because these events often lead to sudden price increases that hurt many sudden price increases that hurt many people but benefit a fewpeople but benefit a few

The Market for Apartments in the Absence of The Market for Apartments in the Absence of Government ControlsGovernment Controls

1.6 1.70 1.8 1.9 2.0 2.22.1 2.3 2.4

$1,400

1,300

1,200

1,100

1,000

900

800

700

600



D

E

S

$1,4001,3001,2001,1001,000

900800700600

2.42.32.22.12.01.91.81.71.6

1.61.71.81.92.02.12.22.32.4

Quantity supplied

Quantity demanded


Quantity of apartments(millions)

The Effects of a Price CeilingThe Effects of a Price Ceiling

1.60 1.8 2.0 2.2 2.4

$1,400

1,200

1,000

800

600


Monthly rent(per apartment)

D

S

E

BA

Price ceiling

Effects of Price CeilingsEffects of Price Ceilings

• Don’t always cause a shortageDon’t always cause a shortage• If a price ceiling is set above the If a price ceiling is set above the

equilibrium price, it won’t have any equilibrium price, it won’t have any effecteffect• But sometimes price ceilings can But sometimes price ceilings can

cause _________________cause _________________


The effects of Rent Controls:The effects of Rent Controls:1.1. Reduces the quantity of apartments rented Reduces the quantity of apartments rented

below the efficient levelbelow the efficient level2.2. Leads to misallocation of apartments among Leads to misallocation of apartments among

would-be renterswould-be renters3.3. Leads to wasted time and effort as people Leads to wasted time and effort as people

search for apartmentssearch for apartments4.4. Leads to landlords maintaining apartments Leads to landlords maintaining apartments

in inefficiently low quality or conditionsin inefficiently low quality or conditions


• Rent controls reduce the number of apartments supplied and they reduce the number of apartment rented

A Price Ceiling Causes Inefficiently Low A Price Ceiling Causes Inefficiently Low QuantityQuantity

1.60 1.8 2.0 2.2 2.4

$1,400

1,200

1,000

800

600



D

S

E

Price ceiling

Quantity supplied with rent control

Quantity supplied without rent control

Deadweight Deadweight Loss isLoss is

Deadweight LossDeadweight Loss

• Key concept in economicsKey concept in economics• Occurs whenever an action or a policy leads Occurs whenever an action or a policy leads

to a reduction in the quantity transacted to a reduction in the quantity transacted below the efficient market equilibrium below the efficient market equilibrium quantityquantity

• Deadweight loss is a loss to society – Deadweight loss is a loss to society –

Price Ceilings Causing Inefficient Price Ceilings Causing Inefficient Allocation to ConsumersAllocation to Consumers

• 2.2 million people wanted to rent an apartment at 2.2 million people wanted to rent an apartment at $800 month$800 month

• Only 1.8 million apartments are availableOnly 1.8 million apartments are available• Of the 2.2 million people, Of the 2.2 million people,

• An efficient allocation of apartments would reflect An efficient allocation of apartments would reflect these differences, one who wants one urgently will these differences, one who wants one urgently will get one and people who can wait will not get one get one and people who can wait will not get one BUT….this does not happenBUT….this does not happen

Inefficient Allocation to Inefficient Allocation to ConsumersConsumers

• Instead, in an inefficient distribution Instead, in an inefficient distribution of apartments, people who aren’t in of apartments, people who aren’t in a hurry will get one and those who a hurry will get one and those who are, won’t.are, won’t.

WHY????WHY????

Price Ceilings Causing Wasted Price Ceilings Causing Wasted ResourcesResources

• Price ceilings typically lead to inefficiency in Price ceilings typically lead to inefficiency in of wasted resourcesof wasted resources

• People expend money, effort, and time to People expend money, effort, and time to cope with the shortages caused by the price cope with the shortages caused by the price ceilingceiling

Price Ceilings Causing Goods to be Price Ceilings Causing Goods to be of Low Qualityof Low Quality

Price Ceilings Causing Illegal Price Ceilings Causing Illegal ActivitiesActivities

• Price Ceilings can lead to goods being Price Ceilings can lead to goods being bought and sold illegallybought and sold illegally

• Black Markets are Black Markets are

Why are there Price Ceilings?Why are there Price Ceilings?

1.1. They do benefit some peopleThey do benefit some people2.2. Buyers may not even know the goods Buyers may not even know the goods

they are using/buying have price they are using/buying have price controlscontrols

3.3. And (according to textbooks and And (according to textbooks and economists) government officials do not economists) government officials do not understand supply and demand analysisunderstand supply and demand analysis

Price FloorsPrice Floors

• Government intervention to push Government intervention to push market prices up instead of downmarket prices up instead of down

The Market for Butter in the Absence The Market for Butter in the Absence of Government Controlsof Government Controls

$1.40$1.30$1.20$1.10$1.00$0.90$0.80$0.70$0.60

14.013.012.011.010.09.08.07.06.0

8.08.59.09.5

10.010.511.011.512.0

Quantity of butter(millions of pounds)


Quantity supplied

Quantity demande

d


6 70 8 9 10 11 1312 14

$1.40

1.30

1.20

1.10

1.00

0.90

0.80

0.70

0.60


D

S

E

The Effects of a Price FloorThe Effects of a Price Floor

60 8 9 10 12 14

$1.40

1.20

1.00

0.80

0.60 D

S

E

BA

Price floor



Effects of a Price FloorEffects of a Price Floor

• Price floors do not always lead to an Price floors do not always lead to an unwanted surplusunwanted surplus

• Some price floors are irrelevantSome price floors are irrelevant• If a price floor is binding (permanent) If a price floor is binding (permanent)

what happens to the unwanted surplus?what happens to the unwanted surplus?

Price Floors Causes Low QuantityPrice Floors Causes Low Quantity

• Price floors raise the price of a good to Price floors raise the price of a good to consumersconsumers

• Price floors also reduce the quantity of that Price floors also reduce the quantity of that good demanded – sellers can’t sell more good demanded – sellers can’t sell more units of a good than buyers are willing to payunits of a good than buyers are willing to pay

• Price floors reduces the quantity of a good Price floors reduces the quantity of a good bought and sold below the market bought and sold below the market equilibrium quantity and leads to a equilibrium quantity and leads to a deadweight lossdeadweight loss

A Price Floor Causes Inefficiently Low QuantityA Price Floor Causes Inefficiently Low Quantity

60 8 9 10 12 14

$1.40

1.20

1.00

0.80

0.60 D

S

E

Quantity demanded with price floor

Quantity demanded without price floor

Deadweight loss

Price floor



Price Floors Causes Inefficient Price Floors Causes Inefficient Allocation of Sales Among SellersAllocation of Sales Among Sellers• Price ceilings can lead to inefficient Price ceilings can lead to inefficient

allocation allocation • Price floors can cause inefficient Price floors can cause inefficient

allocation of sales among sellers allocation of sales among sellers

Price Floors Cause Wasted Price Floors Cause Wasted ResourcesResources

• Government purchasing of unwanted Government purchasing of unwanted surplus of agricultural productssurplus of agricultural products

• Surplus is destroyed or it is stored and Surplus is destroyed or it is stored and will go bad eventuallywill go bad eventually

• Price floors also lead to wasted time Price floors also lead to wasted time and effortand effort

Price Floors Cause Inefficiency in Price Floors Cause Inefficiency in the Quality of Goods Producedthe Quality of Goods Produced

• Sellers offer high-quality goods at a high Sellers offer high-quality goods at a high price, even though buyers would prefer price, even though buyers would prefer a low quality at a lower pricea low quality at a lower price

Price Floors Cause Illegal ActivityPrice Floors Cause Illegal Activity

• Price floors cause incentives for illegal Price floors cause incentives for illegal activityactivity

Review:Review:

• The state legislature mandates a price The state legislature mandates a price floor for gasoline of Pfloor for gasoline of Pff per gallon. per gallon. Assess the following statements and Assess the following statements and illustrate your answer using the figure illustrate your answer using the figure provided.provided.

a.a. Proponents of the law claim it will increase the Proponents of the law claim it will increase the income of gas station owners. Opponents claim it income of gas station owners. Opponents claim it will hurt gas station owners because they will lose will hurt gas station owners because they will lose customers.customers.

b.b. Proponents claim consumers will be better off Proponents claim consumers will be better off because gas stations will provide better service. because gas stations will provide better service. Opponents claim consumers will be generally worse Opponents claim consumers will be generally worse off because they prefer to buy gas at cheaper prices.off because they prefer to buy gas at cheaper prices.

c.c. Proponents claim that they are helping gas station Proponents claim that they are helping gas station owners without hurting anyone else. Opponents owners without hurting anyone else. Opponents claim that consumers are hurt and will end up doing claim that consumers are hurt and will end up doing things like buying gas in a nearby state or on the things like buying gas in a nearby state or on the black marketblack market..


• Quantity control (quota) is an upper Quantity control (quota) is an upper limit on the quantity of some good that limit on the quantity of some good that can be bought or sold.can be bought or sold.


• The total amount of the good than can The total amount of the good than can be transacted under the quantity be transacted under the quantity control is a quota limitcontrol is a quota limit

• Controlling quantity is done though a Controlling quantity is done though a license, an owner is given the right to license, an owner is given the right to supply a goodsupply a good

The Market for Taxi Rides in the The Market for Taxi Rides in the Absence of Government ControlsAbsence of Government Controls

6 7 90 8 10 11 1312 14

$7.00

6.50

6.00

5.50

5.00

4.50

4.00

3.50

3.00 D

S

E


Fare (per ride)

$7.00

$6.50

$6.00

$5.50

$5.00

$4.50

$4.00

$3.50

$3.00

14

13

12

11

10

9

8

7

6

6

7

8

9

10

11

12

13

14


Fare(per ride)

Quantity supplied

Quantity demanded


• NYC limits the quantity of taxi rides to 8 NYC limits the quantity of taxi rides to 8 million per yearmillion per year

• Medallions are available to selected Medallions are available to selected drivers for a total of 8 million ridesdrivers for a total of 8 million rides

• Medallion holders can drive their own Medallion holders can drive their own taxi or rent their medallions to others taxi or rent their medallions to others for a feefor a fee

Effect of a Quota on the Market for Taxi RidesEffect of a Quota on the Market for Taxi Rides

$7.00

$6.50

$6.00

$5.50

$5.00

$4.50

$4.00

$3.50

$3.00

14

13

12

11

10

9

8

7

6

6

7

8

9

10

11

12

13

14


Fare(per ride)

Quantity supplied

Quantity demande

d

A

B

6 70 8 9 10 11 12 13 14

$7.00

6.50

6.00

5.50

5.00

4.50

4.00

3.50

3.00 D

S

E

Deadweight loss

The “wedge”

Quota


Fare (per ride)


• How can the price received (quantity How can the price received (quantity supplied) be different from the price paid supplied) be different from the price paid (quantity demanded)?(quantity demanded)?

• Two transactions and thus two pricesTwo transactions and thus two prices

Controlling QuotasControlling Quotas• In every case at which the supply of goods is legallyIn every case at which the supply of goods is legallyrestricted there is a wedgerestricted there is a wedge• A wedge between the A wedge between the demand price of the quantity demand price of the quantity transacted and the supply pricetransacted and the supply priceof the quantity transactedof the quantity transacted• This line represents the This line represents the quota rent which is the quota rent which is the earnings that accrue to the license-holder fromearnings that accrue to the license-holder fromownership of the right to sell the good. It is equal toownership of the right to sell the good. It is equal tothe market price of the license when the license arethe market price of the license when the license aretradedtraded

Quantity Controls Side EffectsQuantity Controls Side Effects

price and quality controls. price controls legal restrictions on how high or low a market may go...

Documents

equilibrium price

low price

service price ceilings

price ceiling causes

service price floor

minimum price buyers

maximum price sellers

sudden price increases