Price Controls w/market failure

• Price controls


  Measures used to solve market failure
• Minimum price/Price floor


  A price set above the equilibrium price to discourage consumption of demerit goods with negative externalities
• Contexts for minimum prices


  • Alcoholic drinks in Scotland
  • Alcoholic drinks in Canada
• Free market equilibrium price and quantity


  Overconsumption and overproduction of alcoholic drinks
• Imposing a minimum price above equilibrium

  Contracts demand, reduces quantity to socially optimal level, internalizes externalities, improves welfare
• Issues with minimum prices

  • Inelastic demand means quantity may not fall enough to fully solve market failure
  • Regressive, burdens the poor more
  • Can lead to black market activity and alternative supplies
  • Can negatively impact producers and cause unemployment
• Maximum price/Price ceiling


  A price set below the equilibrium price to promote equity and encourage more consumption of essential goods
• Contexts for maximum prices

  • Rent control in cities like New York and Berlin
• Imposing a maximum price below equilibrium

  Reduces price, extends demand, but creates a shortage and excess demand
• Issues with maximum prices

  • Creates a shortage and black market activity
  • Reduces supply incentives, leading to lower quality and less production of essential goods
  • Difficult to enforce and set at the right level
• Governments face high costs in trying to increase supply to meet excess demand caused by price ceilings