Price Cap Regulation

and finance Allah shmoop what our price and quantity controls

All right people while the invisible hand does a lot

of good bringing consumer demand to producer supply at equilibrium

But sometimes the invisible hand can't work its magic For

instance in cases of monopoly on Olonga pally firms are

incentivized to produce less quantity at higher prices you know

than they would if they had some competition Well in

cases like these the government can step in to try

to correct the market making it more efficient by setting

price and quantity controls In other cases the government may

set price and quantity controls in response to social issues

and actually creating market distortion rather than a correcting one

So how do price and quantity controls work If you

look at your typical supply and demand graph like this

take a look at the axes on the X axis

We've got quantity on the Y axis We've got price

Since the X axis and a Y axis are price

and quantity on the graph well those are the two

things the government has to play with to affect the

markets No excess demand or supply means we're at equilibrium

where supply and demand cross like right there This means

the supply a good or service is sold at matches

the same supply demand it all for an agreed upon

price by buyers and sellers What market inefficiencies produce what's

called a dead weight loss which we can see on

the graph right there representing the cost of inefficiency When

there's either excess supply or excess demand while we Khun

see dead weight loss the larger the deadweight loss triangle

on the graph while the farther away from equilibrium The

market is when there's excess demand That means there's a

shortage of supply when lots of people want a limited

quantity of stuff while prices skyrocket On the flip side

when there's excess supply demand shrinks When there's an abundance

of something compared to you know how much of it

people want Well prices fall sometimes Government price in quantity

controls are designed to reduce deadweight loss and other times

these controls create deadweight loss First up price controls A

government can set a price control basically setting price limitations

on firms in a certain market Well there's two main

types of price controls Price ceilings and price floors Well

price ceilings mean there's an upper limit on how much

affirm Khun Selig odor service for For instance a government

might set a price ceiling on something that everyone needs

to keep you know affordable like food for natural monopolies

that affect a lot of society like utilities Internet service

providers and buses that buses Will governments oftentimes set a

price ceiling Will these air all natural monopolies since their

monopolies that happened spontaneously from very high fixed startup costs

Price ceilings on natural monopolies like these insure businesses aren't

taking too much advantage of their monopoly status and overcharging

consumers on those evil business is rent controlled areas are

another example of price ceilings However rent controlled areas are

more likely creating a dead weight loss Ten Getting rid

of one but artificially lowering the cost of housing that

creates excess demand Rent control Lower supply to since that

means landlords and rent controlled areas will be feeling the

squeeze of the price ceiling Why be a landlord in

an area where prices are kept artificially low Hello rent

control when you could be a landlord in an unregulated

red state area with much higher rent prices in therefore

profits These landlords and rent controlled areas who are making

less money because of government intervention are then incentivized to

provide housing with you know worst quality Another reason government

might set a price ceiling is to prevent hyper inflation

which history has told us happens often during war time

Right Well price floors are the opposite you know when

a government sets a lower bound on price for firms

While price ceilings often help consumers price floors often help

producers For instance governments sometimes help farmers out by setting

price floors on things like milk By setting the price

artificially high though this can create reduced a man and

excess supply usually does well In the case of farmers

governments usually set price floors along with the promise of

buying up any excess supply from farmers Well why does

the government bother helping out these farmers and keeping him

around Technology made farming go from meeting a ton of

people needing very few people for the same output of

food producing on mass farming equipment fancy fertilizers and pesticides

Ball radically transformed the farming industry Some governments have used

price floor simply to reduce consumer demand for a good

for instance making alcohol or tobacco more expensive would ideally

drive demand for alcohol and tobacco down well in the

labor market Minimum wages a price floor Here the suppliers

are workers not the firms Firms are demanding labor and

workers are supplying it to remember when the price of

something rises It's usually followed by a drop in demand

Okay so what about quantity controls Well a quantity control

is usually referred to as a quota and it limits

the quantity of a good quotas work well in cases

when controlling the quantity is easier or more important than

controlling the cost For instance a government may set a

quota for nuclear power plants since there's a potentially high

social cost If you know something went awry and the

international markets it's common for countries to set import quotas

So this quota restricts a supply of a certain good

from international markets so that gives the domestic country a

leg up against them Foreign competitors like another example of

quota on imported steel would mean that domestic steel firms

would get an advantage over imported steel while international quotas

benefits some domestic firms This comes at the cost of

everyone buying the goods meaning a steel quota in the

US would mean higher steel prices from domestic steel producers

then from cheaper foreign producers in an unregulated market A

limited number of hunting and fishing licenses and tags are

another example of quotas in order to keep hunting and

fishing populations you know in existence the young ones have

to be given time to be born grow up and

reproduce right Well oftentimes A combination of quotas and price

floors in the form of high price licenses and tags

are used to keep hunted and fished populations at sustainable

levels Setting a quota a quantity limit has similar effects

as a price floor Artificially restricting quantity sold means higher

prices and lower demand compared to free market equilibrium Well

if you were wondering it's not too common when a

capitalistic government sets a quantity minimum or floor But if

they did in theory it'd create a surplus of supply

compared to equilibrium levels and potentially would need to be

supported by the government like price floors on agriculture to

make up for the lack of demand Well for instance

let's say in the future the government created an enforceable

law on the labor market making firms hire a minimum

number of people in response to shrinking jobs Yes Hello

Robots They're coming for our jobs Firms would then be

forced to hire people when they wouldn't want or need

thio creating forced oversupply of workers on two firms Well

all this government regulation can breathe rebellion rebellion in the

form of the underground economy the market free of any

government regulations And yes black market milk is a thing 00:07:15.992 --> [endTime] just like black market booze Hey