5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

is an overallocation of resources to milk production. Quite simply, the policy produces a

situation where “too much” milk is produced.

Price Ceilings

For some goods and services, the market equilibrium price is judged to be “too high.”

Consumers who feel that the price is so high that it prevents a significant fraction of citi-

zens from being able to consume a good, usually express this sentiment. If the government

agrees with this argument, a price ceilingmay be installed at a level below the equilibrium

price. A price ceiling is a legal maximum price above which the product cannot be

bought and sold. A price ceiling in the market for rental apartments (rent control) is seen

in Figure 7.15.

The resulting shortage of rent-controlled apartments is not eliminated through the

market, and this creates a sticky situation for low-income households, the group for which

the policy was intended. Many suppliers completely remove their rental units from the

market, converting them into office space or condominiums. Others attempt to increase

profits by lowering levels of health and safety maintenance, or by charging exorbitant fees

for a key to the apartment. For families lucky enough to find rent-controlled space, the

result of this policy is certainly lower rents, but the shortage also tends to create an under-

ground or “black” market for apartments where a vacant apartment might go to the high-

est bidder, regardless of financial need. If the price elasticities of demand or supply are large,

the shortage, and the negative consequences of it, increase.

Again, this form of price control results in lost efficiency for society. When suppliers

reduce their quantity supplied below the competitive equilibrium quantity, there is a

Elasticity, Microeconomic Policy, and Consumer Theory ‹ 89

Quantity

Price $ S

0

D 0

Q 0

P 0

PF

surplus

Qd Qs

MC>MB

Figure 7.14

“Always
remember on the
graphs that floors
are HIGH and
ceilings are
LOW.”
—Kristy,
AP Student

TIP

KEY IDEA

• A price floor is installed when producers feel the market equilibrium price is
  “too low.”


• A price floor creates a permanent surplus at a price above equilibrium.


• If the government purchases the surplus, taxpayers eventually pay the bill.


• The more price elastic the demand and supply curves, the greater the surplus and the
  greater the government spending to purchase the surplus.


• The price floor reduces net benefit by overallocating resources to the production of
  the good.