Monday, October 08, 2007

Note on price controls.

This is in the notes but I want to remind you to focus on price controls, both price ceilings and floors.

Remember that a price ceiling is a maximum price that a market is allowed to charge. If set below the equilibrium rate, this will lead to a permanent shortage

A price floor is the lowest price a market can charge. It set above the market price then a permanent surplus will result. Here the government usually buys all the extra goods up and stores it somewhere to rot away.

The easy economic solution is to remove the price control. However, oftentimes this proves to be tough politically (witness price controls in the agriculture industry).