ECONOMICS
and
MICROECONO
MICS
Paul Krugman | Robin
Wells
Chapter 5
Price Controls and Quotas: Meddling with
Markets
WHAT
YOU
WILL
LEARN
IN THIS
CHAPTER
Taxis in NY
Price Ceilings
Price ceilings are typically imposed during crises
wars, harvest failures, natural disasters
because these events often lead to sudden price
increases that hurt many people but produce big
gains for a lucky few.
Examples:
U.S. governmentimposed ceilings on aluminum
and steel during World War II
Rent control in NY, Stockholm,
$1,400
1,300
1,200
1,100
1,000
900
800
700
600
Monthly
rent (per
apartment)
$1,400
1,300
1,200
1,100
1,000
900
800
700
600
Quantity of apartments
(millions)
Quantity
demanded
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
Quantit
y
supplie
2.4
d
2.3
2.2
2.1
2.0
1.9
1.8
1.7
1.6
$1,400
1,200
E
1,000
A
800
Housing shortage
of 400,000
apartments caused
by price ceiling
600
1.6
1.8
2.0
Price
ceiling
2.2
2.4
Quantity of apartments (millions)
Deadweight loss
from fall in
number of
apartments
rented
$1,400
Welfare th
disappea
Demand w
diminish al
1,200
E
1,000
800
Price
ceilin
g
600
1.6
1.8
Quantity
supplied
with rent
control
2.0
2.2
Quantity
supplied without
rent control
2.4
Quantity of apartments
(millions)
$1,400
1,200
Monthly rent
(b) After Rent Control
(per
Consumer
apartment)
surplus
S
Consumer
surplus
$1,400
transferred
from producers
1,200
Price
1,000
800
800
600
ceilin
g
1,000
600
Producer
surplus
1.6
1.8
Producer Deadweight
surplus
loss
D
2.0
2.2
2.4
1.6
1.8
2.0
2.2
2.4
ECONOMICS IN ACTION
Hunger and Price Controls in Venezuela
ECONOMICS IN ACTION
Hunger and Price Controls in Venezuela
Price Floors
Sometimes governments intervene to push
market prices up instead of down.
The minimum wage is a legal floor on the wage
rate, which is the market price of labor.
Just like price ceilings, price floors are intended
to help some people but generate predictable
and undesirable side effects.
Price of
butter
(per pound)
$1.40
1.30
1.20
1.10
1.00
0.90
0.80
0.70
0.60
10
11
12
13 14
$1.40
1.20
B
Price
floor
E
1.00
0.80
0.60
10
12
14
$1.40
1.20
Deadweight
loss
Price
floor
1.00
0.80
0.60
8
Quantity
demanded
with price
floor
10
12
Quantity
demanded
without price
floor
14
Quantity of butter
(millions of
pounds)
PITFALLS
Ceilings, Floors, and Quantities
A price ceiling pushes the price of a good down.
A price floor pushes the price of a good up.
Both floors and ceilings reduce the
quantity bought and sold.
If sellers dont want to sell as much as buyers
want to buy, its the sellers who determine the
actual quantity sold, because buyers cant force
unwilling sellers to sell.
If buyers dont want to buy as much as sellers
want to sell, its the buyers who determine the
actual quantity sold, because sellers cant force
unwilling buyers to buy.
ECONOMICS IN ACTION
Black Labor in Southern Europe
ECONOMICS IN ACTION
Black Labor in Southern Europe
Controlling Quantities
A quantity control, or quota, is an upper limit
on the quantity of some good that can be bought
or sold. The total amount of the good that can
be legally transacted is the quota limit. An
example is the taxi medallion system in New
York.
A license gives its owner the right to supply a
good.
The demand price of a given quantity is the
price at which consumers will demand that
quantity.
The supply price of a given quantity is the
Fare
(per ride)
S
$7.00
6.50
6.00
5.50
5.00
4.50
4.00
3.50
3.00
$7.00
$6.50
Quantit
y
supplie
14
d
13
$6.00
12
$5.50
11
$5.00
10
10
$4.50
11
$4.00
12
$3.50
13
$3.00
14
Quantity of rides
(millions per year)
9 10 11 12 13 14
Quantity of rides (millions per year)
Quantity
demanded
Fare
(per ride)
Fare
(per ride)
$7.00
6.50
6.00
5.50
5.00
A
The
wedge
4.50
4.00
3.50
3.00
Quota
10
11
12
$7.00
Quantity
demande
6d
$6.50
Quantit
y
supplie
14
d
13
$6.00
12
$5.50
11
$5.00
10
10
$4.50
11
$4.00
12
$3.50
13
$3.00
14
Deadweight
loss
13
Quantity of rides
(millions per year)
14
Quantity set by q
is lower than tha
Eq
Uber
https://hbr.org/2014/12/what-economists-dont-g
et-about-ubers-surgepricing
https://hbr.org/2014/03/why-uber-needs-clearerpricing
https://hbr.org/2015/02/the-taxi-industry-can-inn
ovatetoo
http://www.cnbc.com/id/102687766
ECONOMICS IN ACTION
The Clams of New Jersey
SUMMARY
1. Even when a market is efficient, governments
often intervene to pursue greater fairness or to
please a powerful interest group. Interventions
can take the form of price controls or
quantity controls, both of which generate
predictable and undesirable side effects
consisting of various forms of inefficiency and
illegal activity.
SUMMARY
2. A price ceiling, a maximum market price
below the equilibrium price, benefits successful
buyers but creates persistent shortages.
Because the price is maintained below the
equilibrium price, the quantity demanded is
increased and the quantity supplied is
decreased relative to the equilibrium quantity.
This leads to predictable problems:
inefficiencies in the form of deadweight loss
from inefficiently low quantity, inefficient
allocation to consumers, wasted
resources, and inefficiently low quality. It
also encourages illegal activity as people turn
to black markets to get the good.
SUMMARY
3. A price floor, a minimum market price above
the equilibrium price, benefits successful
sellers but creates persistent surplus.
Price floors lead to inefficiencies in the form of
deadweight loss from inefficiently low quantity,
inefficient allocation of sales among sellers,
wasted resources, and inefficiently high quality.
It also encourages illegal activity and black
markets.
The most well-known price floor is the
minimum wage, but price floors are also
commonly applied to agricultural products.
SUMMARY
4. Quantity controls, or quotas, limit the
quantity of a good that can be bought or sold.
The quantity allowed for sale is the quota
limit.
The government issues licenses to
individuals, the right to sell a given quantity of
the good.
Economists say that a quota drives a wedge
between the demand price and the supply
price; this wedge is equal to the quota rent.
Quantity controls lead to deadweight loss in
addition to encouraging illegal activity.
KEY TERMS
Price controls
Price ceiling
Price floor
Deadweight loss
Inefficient allocation to consumers
Wasted resources
Inefficiently low quality
Black markets
Minimum wage