2-1.4. Direct Price Controls: Price Ceilings

Loading...

Из курса от партнера University of Illinois at Urbana-Champaign

Firm Level Economics: Consumer and Producer Behavior

539 оценок

Explore Related Videos

At Coursera, you will find the best lectures in the world. Here are some of our personalized recommendations for you

University of Illinois at Urbana-Champaign

Firm Level Economics: Consumer and Producer Behavior

539 оценок

Курс 1 из 7 — Specialization Managerial Economics and Business Analysis

All goods and services are subject to scarcity at some level. Scarcity means that society must develop some allocation mechanism – rules to determine who gets what. Over recorded history, these allocation rules were usually command based – the king or the emperor would decide. In contemporary times, most countries have turned to market based allocation systems. In markets, prices act as rationing devices, encouraging or discouraging production and encouraging or discouraging consumption in such a way as to find an equilibrium allocation of resources. We will construct demand curves to capture consumer behavior and supply curves to capture producer behavior. The resulting equilibrium price “rations” the scarce commodity. Markets are frequent targets of government intervention. This intervention can be direct control of prices or it could be indirect price pressure through the imposition of taxes or subsidies. Both forms of intervention are impacted by elasticity of demand. After this course, you will be able to: • Describe consumer behavior as captured by the demand curve. • Describe producer behavior as captured by the supply curve. • Explain equilibrium in a market. • Explain the impact of taxes and price controls on market equilibrium. • Explain elasticity of demand. • Describe cost theory and how firms optimize given the constraints of their own costs and an exogenously given price. This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.

Из урока

Module 2: Government Intervention in Markets

Markets are frequent targets of governments. This module will introduce government policy intervention into the market. This intervention can be direct control of prices or it could be indirect price pressure through the imposition of taxes or subsidies. Both forms of intervention are impacted by elasticity.

2-1.1. Setting Dairy Prices0:46

2-1.2. Government Intervention3:07

2-1.3. Direct Price Controls: Price Floors7:12

2-1.4. Direct Price Controls: Price Ceilings8:06

Познакомьтесь с преподавателями

Larry DeBrock
Dean Emeritus and Professor of Finance and Professor of Economics
University of Illinois, Urbana-Champaign College of Business Department of Business Administration

Continuing along with our investigation into direct price controls by the government,

we looked at price floors.

Price floors are prices that the government

doesn't allow the market to pry their price lower than that.

Now, we want to think about the opposite of that.

Something called a price ceiling.

That is, prices are not permitted to go above that level.

Examples of price ceilings?

Now, every now and then,

the government would intervene and put a price on.

Prices just can't go above this level.

Some metropolitan areas, some states have regulations that

following a traumatic catastrophe event like for example a hurricane,

that suppliers are not allowed to raise the price of

some needed commodities like milk or ice or chainsaws after these events.

So, there are certain times where the government will

just put a maximum price and say, say that's it.

Probably, the one that is the strongest example over the history of the United States,

has been something called rent control.

So let's think about rent controls as examples of price ceilings.

We'll draw our axis system,

and on the vertical axis,

we're going to measure price,

which in this case is rent.

On the horizontal axis,

we're going to measure quantity,

which in this case is the quantity of apartments for rent.

We'll draw an original supply that looks something like

this and an original demand that looks something like this.

That gives us a market clearing price,

we'll label as P_0, Q_0.

That's the price that the free market would find if left to its own devices.

Now, sometimes that price is deemed to be too high.

So, we'll take an example of rent control.

Sometimes, the City Municipal Authority will look at rents and say,

"These rents are out of line with what the typical person can afford."

I mean if you're wealthy, you can afford it.

But, no monthly rents in midtown Manhattan could get into several $1,000 range.

Now, some people might say well that's just,

it's just not possible for the normal family to live there.

Now and then, city councils will say, "Well,

what we ought to do is let's just say,

a reasonable number is something less than that."

So, suppose they come along and say,

"We have a price ceiling that can't go above this level."

For example might be that if the prices in Manhattan,

where $3,500 a month,

the city council might say,

"Well, for this building,

it's going to be $800 a month."

They control these prices.

It's not exactly how it works.

Typically, they don't announce a price,

they'll announce a time and say this building is rent

controlled and they'll quote the price at the current price,

and then as going forward as the demand continues to grow,

the clearing price would be going above what that is.

That's an out of equilibrium situation.

We'll do well with this picture to understand how

that out of equilibrium situation looks.

When you get to a situation where the amount that consumers wish to purchase,

we'll call this X,

the amount of apartments actually in the market, we'll call Y.

Well, you say, "Wait a minute Larry,

the apartments were there, how could this happen?"

Well, what happens over time is that the landlord is willing

in fact to put Q_0 units out if it can get this rent.

But if the rent is some capped level lower,

the landlord just doesn't,

sometimes they just don't repair certain units.

If the plumbing goes out,

or the unit has electricity problems or

the unit has some structural problem, they just won't repair it.

So, what happens over time is that there's just less of these units

available because no one's putting the effort into it anymore given this lower price.

So, as a result,

you get this situation where there's a lot of people who want the product,

We'll call that X and not very many of the units are available.

Maybe you're even just given part of your apartments to your relatives,

and say, "Well, at this price,

if I can get anything more for it,

at least I'll let my son or daughter or live here or something like that."

Anyway, you'll look at it. This is an out of equilibrium situation,

there's too much of quantity demanded and not enough quantity supply.

So, how do we go about solving this problem?

Well, it's a difficult issue.

The market is not allowed to decide who gets what.

We started our entire adventure in

thinking about economics by thinking about the fact that there's scarcity.

Two, there's just not enough to go around.

In this case, the price ceiling has created an artificial scarcity.

People want a lot more of the apartments than there are apartments to go around.

Normally, price would float up to that P_0 and the market will be cleared.

In this case, it's not allowed for that to happen.

So, you see that there's not going to be very many units put on the market.

At this amount, the landlords could actually if they could get away with it,

charge a really high price, okay?

At that amount, enough people would be willing to pay this amount,

but they can't because they can't get any price higher than the price ceiling.

So, how does this process work?

Who makes the allocation decision?

Well, unfortunately the allocation decision is made by essentially non-market forces.

So, it's not uncommon in some cities in

America to drive by a long line of people out on the sidewalk in the morning,

and you ask what's happening here?

Your friend who you're staying for

a few days with somebody in say San Francisco and they'll say,

"Well, that's a rent controlled neighborhood,

somebody must have died."

The idea is that now there's going to

be a lot of people who are going to interview for this particular apartment,

and you can imagine those interview process.

Those people would say, "Look,

if I can get this apartment for only $600 a month rent,

whereas the market clearing price is $3,000,

I'll make sure I'll call the landlord up and say

hey how about if I put hardwood floors in?

Or how about if I put a granite counter-top in?"

The landlord isn't going to do it because

he or she is now subject to this binding constraint that is lower priced.

But, the landlord picks the tenant correctly,

which may be someone who has a lot of wealth to begin with.

They can actually end up subsidizing these people and then people will

put a lot of their own cash into making sure

the apartment stays up to code and in fact it,

is better than code with granite and hardwoods

instead of that which you wouldn't have had otherwise.

Again, it defeats the purpose of what the city was all about to begin with.

The city's goal was to make

the apartment cheap enough that people of all sorts of income levels,

that a great diversity and population could come into this area.

But the end result is,

by driving down the availability of the units,

you let someone else make the allocation decision,

and that allocation decision based on economics would be, "Well,

I'm going to put people in there who have

the most ability to actually fix the apartment up and take care of it."

Probably not the same outcome to what the city wanted.

This is a tough problem.

People always try to figure out how to handle this problem that prices are too high.

Many cities try different approaches.

Some cities, they go out by just building lots of

housing units for people who have a certain level of incomes below a level,

where you can live in these housing areas.

Turns out those are not the most successful.

Those are not the most successful outcome.

It's a way to try to attack the problem but

the government instead of just trying to restrict price,

they might try to grow the supply.

But without letting the market intervene so

that we can get some movement in and out of these populations.

The outcome is usually not very good.

Ознакомьтесь с нашим каталогом

Присоединяйтесь бесплатно и получайте персонализированные рекомендации, обновления и предложения.

Coursera делает лучшее в мире образование доступным каждому, предлагая онлайн-курсы от ведущих университетов и организаций.

© Coursera Inc., 2019 Все права защищены.

Загрузить из App Store

Загрузить в Google Play