Price ceilings lead to shortages.

Shortages create a rationing problem --- somehow, it must be determined who will get the product and who will not. There are many ways to resolve the problem of shortages. (1) The most common way to resolve the shortage problem is first-come, first-served. Shortages are typically associated with long lines. (2) Another common way to resolve the problem of shortages is for the sellers to choose which buyers they will sell to. Landlords often rent to preferred renters. (3) A third way to resolve the problem of shortages is by lottery. Those who pick the right numbers are allowed to buy. (4) And a fourth way to resolve the problem of shortages is to have the government make the choice of buyer.

Price ceilings provide a gain for buyers and a loss for sellers. Sellers would like to avoid the loss if they can. One way to do so is called a black market. In this case, the sellers illegally raise the price and hope to get away with it. So, for example, tickets to popular events are sold by scalpers at high prices. While there are many other examples, black markets are not smart; it is just too easy to be caught. It is also not smart because of the existence of gray markets. A gray market is a way of getting around the price ceiling without actually doing anything illegal. There are two forms of gray market. One form of gray market involves charging for goods or services that were formerly provided free. The second form of gray market is to provide less service for the same price.

Price Floors

A price floor exists when the price is artificially held above the equilibrium price and is not allowed to fall. There are many examples of price floors. In some cases, private businesses maintain the price floor while, in other cases, it is the government that maintains the price floor. One price floor that was maintained by the private businesses used to be called “fair trade”. In the case of fair trade, the manufacturer would set a price for the product that was above the equilibrium price. The manufacturer then told the retail stores that the price could not be lowered or the store would not be able to sell any of the manufacturer's products.

There were many ways to solve the problem of surpluses. Occasionally, a store simply broke the manufacturer's policy. The store lowered the price to get rid of the surplus. The manufacturer had threatened that the store would be prohibited from selling the manufacturer's product; the store either believed that the manufacturer would not carry out the threat or did not care.

More likely, stores would try to get around the price floor without actually violating it. One common solution was to provide more service for the same money. Stereo stores could add free CDs or other free accessories. Washing machine stores used to virtually give away the dryer. Gas stations gave away glasses, knives, and Blue Chip Stamps. A second solution was to simply absorb the surplus. Your textbook producers would have a surplus of textbooks. At the end of each edition, the books would be returned to the publisher and the paper was recycled. A third solution was to change the name of the product in order to reduce the price. Surplus liquor was bottled with a different label and sold as Slim Price or Yellow Wrap at a lower price. Surplus washing machines and refrigerators were sold, for example, to Sears and marketed as Kenmore at a lower price. When automobiles were fair-traded, the dealers could not lower the price; however, they would give a trade-in value that was much greater than the trade-in car was actually worth. The main point here is that, even if someone interferes with the market process, there are powerful forces to return to equilibrium.

Task 7

Date: 2015-12-11; view: 764