A Price Ceiling Sets the Maximum Legal Price

When prices are set by a free market, there is a balance between supply and demand. The quantity delivered at the market price corresponds to the quantity requested at that price. Thus, the introduction of price controls by the government causes either oversupply or excessive demand, as the legal price often deviates significantly from the market price. In fact, the government is putting in place price controls to solve a problem caused by the market price. For example, a rent brake is introduced to make rent more affordable for tenants. This, of course, leads to new problems, such as a decline in new housing construction, but governments often don`t look to the future. Because politicians have limited mandates, they are more inclined to solve current problems and do not worry so much about future problems. As they say, politicians like to kick in the street, which leads to future problems. But preventing future problems does not help politicians get re-elected. Therefore, price controls are a political opportunism to solve current social problems that will find support, at least temporarily, for the politicians who manage the problem, even if price controls are often detrimental to the economy in the long run. Caps on prescription drugs and laboratory tests are another example of a common price cap. In addition, insurance companies often set caps on the amount they reimburse a doctor for a procedure, treatment, or office visit. A price capThe maximum price that can be charged for a product or service.

is a maximum price that can be charged for a product or service. Rent control in many U.S. cities requires a maximum price for housing (usually at the historical price plus an adjustment to inflation). Taxi fares in New York, Washington, DC and other cities are subject to maximum legal rates. During World War II and again in the 1970s, the United States introduced price controls to limit inflation and imposed a maximum price for the legal sale of many goods and services. For a long time, most U.S. states have restricted the legal interest rate that could be charged (this is called usury laws, laws that limit the legal interest rate that can be charged), and that`s why so many credit card companies are based in South Dakota. South Dakota was the first state to abolish such laws.

In addition, ticket prices for concerts and sporting events are often lower than the equilibrium price. Laws prohibiting scalping then set a price cap. Laws that prevent scalping are, of course, generally remarkably ineffective in practice. Since the supply is proportional to the price, a floor price results in an oversupply if the legal price exceeds the market price. Suppliers are willing to deliver more than the market wants at this price. Because the marginal propensity to consume increases with lower incomes. By raising the wages of low-income workers, they will spend their higher disposable income on a living, thereby stimulating the economy. As the increase in technology makes every worker more productive, the price of labor becomes a smaller part of the cost of products and services, so a higher minimum wage will increase market prices very little, if at all.

Therefore, the increase in aggregate demand caused by minimum wage increases, while minimizing the rise in the prices of products and services produced by these workers through technology, will more than offset any negative microeconomic effect of rising wages. In addition, according to the theory of efficiency wages, better-paid workers will work harder and be more productive, thereby increasing output for the firm and the economy. And a higher minimum wage will increase the employment rate and thus increase the overall economic prosperity of the economy! Example: Suppose supply and demand are linear, where the quantity delivered is equal to the price and the quantity demanded is equal to a price minus. In this case, the equilibrium price and the equilibrium quantity are both 1/2. A floor price of p > 1/2 induces a quantity requested of 1 – p. How many units will suppliers offer if a supplier`s business opportunity is random? Suppose that q ≥ 1 – p units are offered. The opportunity to sell a supplier is 1−p q. Thus, the border supplier (who, assuming, has a marginal price of q) has a probability of gaining 1−p q, p, and a certainty of paying q. Exactly q units are delivered if it is a break-even proposition for the marginal supplier, i.e. 1−p q p−q=0 or q= p(1−p). Some governments may cap the prices of essential goods such as food and fuel to ensure access to these vital goods and prevent profits. After the Russian invasion of Ukraine, for example, the German government pledged to cap energy prices due to the shortage of Russian natural gas.

In addition to misallocation of resources (too few units and units not allocated to those who value them most), price caps tend to encourage illicit trade as people try to take advantage of the forbidden profits of trade.

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