Price control

Examples of Price control in the following topics:

• Arguments for and Against Government Price Controls

  • Many argue that price controls ensure resource availability, but most economists agree that these controls should be used sparingly.
  • Well designed price controls can do three things.
  • Finally, when shortages occur, price controls can prevent producers from gouging their customers on price.
  • While price controls may appear to be a sound decision in theory, most economists believe these controls should be used sparingly.
  • Justify the use of price controls when certain conditions are met

• Price Supports

  • Price supports are subsidies or price controls used by the government to artificially increase or decrease prices in the agriculture market.
  • Agricultural economics is a highly complicated market as a result of these price supports and controls, particularly from the perspective of subsidization and price control.
  • This chart shows how subsidies and price controls affect supply and demand.
  • This demonstrates a price control on behalf of the government.
  • Assess the way in which price controls affect supply, demand, and equilibrium pricing in agricultural economics.

• Price Ceilings

  • A price ceiling is a price control that limits how high a price can be charged for a good or service.
  • A price ceiling is a price control that limits the maximum price that can be charged for a product or service.
  • An example of a price ceiling is rent control.
  • Without rent control, there could be situations where the demand for housing in an area could cause rent prices to make a substantial jump.
  • Rent controls limit the possibility of tenant displacement by minimizing the amount by which rent can be increased.

• Price Floors

  • A binding price floor is a price control that limits how low a price can be charged for a product or service.
  • A price floor is a price control that limits how low a price can be charged for a product or service.
  • For a price floor to be effective, it must be greater than the free-market equilibrium price.
  • An example of a price floor is the federal minimum wage.
  • If a price floor is set above the equilibrium price, consumers will demand less and producers will supply more.

• The Demand Curve and Consumer Surplus

  • Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they do pay.
  • Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they do pay.
  • This chart graphically illustrates consumer surplus in a market without any monopolies, binding price controls, or any other inefficiencies .
  • The price in this chart is set at the pareto optimal.
  • This area represent the amount of goods consumers would have been willing to purchase at a price higher than the pareto optimal price.

• Evaluating Policies

  • International Trading Environment: Global agricultural trade is a complex issue, with quality control, pricing (dumping), and import/export tariffs.
  • Price Floors/Ceilings: Price floors provide a minimum price point for a given product while price ceilings create a maximum price point.
  • These are used to ensure appropriate pricing in a given industry (see ), and are often used in agriculture to control price points.
  • Import Quotas: Policy makers often implement quotas in agriculture to retain more control over prices and protect domestic incumbents.
  • This is useful in controlling food prices, reducing waste, enabling efficiency and avoiding biosecurity issues.

• Price Ceiling Impact on Market Outcome

  • A price ceiling will only impact the market if the ceiling is set below the free-market equilibrium price.
  • This is because a price ceiling above the equilibrium price will lead to the product being sold at the equilibrium price.If the ceiling is less than the economic price, the immediate result will be a supply shortage.
  • An effective price ceiling will lower the price of a good, which means that the the producer surplus will decrease.
  • While the effective price ceiling will also decrease the price for consumers, any benefit gained from that will be minimized by decreased sales caused by decreased available supply for sale from producers due to the decrease in price.
  • A black market is an underground network of producers that will sell consumers as much of a controlled good as they want, but at a price higher than the price ceiling.

• Introduction to Deadweight Loss

  • In a perfectly competitive market, products are priced at the pareto optimal point.
  • While price controls, subsidies and other forms of market intervention might increase consumer or producer surplus, economic theory states that any gain would be outweighed by the losses sustained by the other side.
  • The chart above shows what happens when a market has a binding price ceiling below the free market price.
  • Without the price ceiling, the producer surplus on the chart would be everything to the left of the supply curve and below the horizontal line where y equals the free market equilibrium price.
  • With the price ceiling, instead of the producer's surplus going all the way to the pareto optimal price line, it only goes as high as the price ceiling.The consumer surplus extends down to the price ceiling, but it is limited on the right by Harberger's triangle.

• Social Impacts of Monopoly

  • A monopoly can diminish consumer choice, reduce incentives to innovate, and control supply to enforce inequitable prices in a society.
  • This allows for revenues, costs, price, and quantity to achieve a balance where the consumer is provided with the optimal amount of a good at the most equitable price.
  • Through utilizing this control strategically, a profit-maximizing monopoly could create the following societal risks:
  • Now assume one company has the entire supply under it's control, and can discriminate prices along the demand curve to capture higher prices than the available supply should allow.
  • A monopoly with total control over the supply can charge any price that the consumer is willing to pay, and therefore can generate excessive margins while doing very little to improve their product/service or relevant processes.

• Defining Monopoly

  • Price maker: the monopoly decides the price of the good or product being sold.
  • The price is set by determining the quantity in order to demand the price desired by the firm (maximizes revenue).
  • Price discrimination: in a monopoly the firm can change the price and quantity of the good or service.
  • In a monopoly, specific sources generate the individual control of the market.
  • The graph shows a monopoly and the price (P) and change in price (P reg) as well as the output (Q) and output change (Q reg).