Price Ceilings

Five Important Price Ceiling Effects

1. Shortages 2. Reductions in product quality 3. Wasteful lines and other search costs 4. A loss in gains from trade (dead weight loss) 5. A misallocation of resources.

With these price controls on bread, would you expect bread quality to rise or fall?

Fall

If a government decides to make health insurance affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance?

Fewer people will be covered because health insurance companies will supply less

If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to the quantity supplied of bread?

Quantity supplied decreases

Shortages

When the quantity demanded exceeds the quantity supplied. Sellers have more customers than goods. Sellers can cut quality, costs and still sell everything they want to sell at the controlled price. Price control reduce quality.

Reductions in Quality

With surplus of buyers, sellers have less of an incentive to give good service. Another way to lower quality is to reduce service.

Price Ceiling

a maximum price allowed by law.