Jim Whitney Economics 101

The economic effects of price controls

Price ceiling

Price floor
 

Complete the price ceiling information in the table below. The price floor information has been provided as an example:

 Price ceiling   Price floor
Free market Price ceiling Change   Free market Price floor   Change
P* Pc --- price (P) P* Pf ---
24   --- quantity demanded (Qd) 24   ---
24   --- quantity supplied (Qs) 24   ---
---   --- suprlus/shortage ---   ---
ABE     consumer surplus (CS) ABE    
CDF     producer surplus (PS) CDF    
ABCDEF     total social welfare (SW) ABCDEF  

*

Price controls have a variety of predicted effects:
 1. Quantity shortages (with price ceilings) and surpluses (with price floors)
 2. Welfare losses
 3. Wealth transfers
 4. "Non-price" rationing
 5. Cheating and evasion
 6. Product quality adjustments

    *Note regarding the estimated welfare loss of a price floor: This loss presumes that steps are taken to restrict the final production of suppliers to the quantity that buyers will purchase. Failure to accomplish that will result in a different and larger welfare loss due to overproduction that cannot be sold.