Public Sector Economics Price Regulation Examples Rent control ceiling Minimum wage floor College athletes work without cash comp ceiling Biblical prohibitions of usury ceiling Organ donation ceiling ID: 729495
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Slide1
Price Floors and Ceilings
Public Sector EconomicsSlide2
Price Regulation: Examples
Rent control (ceiling)
Minimum wage (floor)
College athletes work
without cash comp (ceiling)
Biblical prohibitions of usury (ceiling)
Organ donation (ceiling)
Salary caps for bank executives (ceiling)
Federal limits on payments to physicians (ceiling)
Farm price supports (floor)
Military pay (ceiling)
Food prices
(ceiling
)Slide3
Price Regulation: Examples
Rent control (ceiling)
Minimum wage (floor)
College athletes work
without cash comp (ceiling)
Biblical prohibitions of usury (ceiling)
Organ donation
(ceiling)
Salary caps for bank executives (ceiling)
Federal limits on payments to physicians
(ceiling)
Farm price supports (floor)
Military pay (ceiling)
Food prices
(ceiling
)Slide4
Price Regulation: Principles
Property rights
Competition
Pre-regulation
Non-price product attributes
Regulator Value
Determinants of the quantity tradedSlide5
The Economic Functions of Prices
Determining the quantity produced and traded
Determining which demanders receive the good
Determining which suppliers produce
Price by itself is zero sum
Exhausting gains from trade: buyer-seller, buyer-buyer, seller-seller
E.g., labor market: price = wage
How many jobs?
Who works? They have time, skills, and/or desire
What tasks? Value-creatingSlide6
Landlords willing to supply at less than $
7
00 but not below $
6
00
An Unregulated Market for Apartments
(same presentation as Krugman & Wells)
1.6
1.7
0
1.8
1.9
2.0
2.2
2.1
2.3
2.4
$1,400
1,300
1,200
1,100
1,000
900
800
700
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
E
S
$1,400
1,300
1,200
1,100
1,000
900
800
700
600
2.4
2.3
2.2
2.1
2.0
1.9
1.8
1.7
1.6
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
Quantity supplied
Quantity demanded
Monthly rent
(per apartment)
Quantity of apartments
(millions)
Households willing to pay more than $1,300 but not $1,400
Choose not to trade
Choose to tradeSlide7
Nonequilibrium
Prices Cannot Allocate
(by themselves)
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
S
WANT to trade
Price ceilingSlide8
Who has the property rights?
Who determines how the good is made?
Who has the right to grant exemptions?
Who assigns the right to use
?
Buyer takes the good by
force: conscription, taxation in kind
Seller decides, or it is part of the regulationSlide9
Assigning the Right to Use
Based on historical transactions
Rent control, minimum wage
Possible neutrality!Slide10
12/24/14: A
security van in Hong Kong spilled bundles of banknotes
… paralyzing
traffic and
igniting a scramble
by passers-by to collect the money
.Slide11
Assigning the Right to Use
Based on historical transactions
Rent control, minimum wage
Possible neutrality!
First come, first served
Lottery
**Willingness to accept a different good
All probably have some kind of DWL, but otherwise are associated with different behaviorsSlide12
First come
,
first served:
Queues 101
Long-side traders compete for priority. The competition itself
uses resources without creating value
for traders on the other side of the market
Esp., wait in line
Price ceiling:
Buyers queue or join wait list
Buyer pays controlled price + cost of waiting
Seller receives only the controlled price
Eastern Europe, Soviet Union consumer products
Healthcare waiting time. U.S. control of gas pricesSlide13
A Queue Allocating Goods to Buyers:
The Waiting Tax
(contradicts
Krugman
and
Wells, and most other textbooks)
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
S
Price ceiling
Consumer surplus: unregulated
Consumer surplus: regulated
Redistribution to consumers
Only high-value buyers remain in the market.
Resources used in waiting
Cost of waiting
goods not supplied
Amount lost by societySlide14
Queues 101
Q
uantity
traded depends on the price
regulation,
and not on any of the characteristics of the
buyers
(e.g.,
their incomeSlide15
A Queue Allocating Goods to Buyers:
Determination of Quantity
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
Price ceilingSlide16
Queues 101
Q
uantity
traded depends on the price
regulation,
and not on any of the characteristics of the
buyers
(e.g.,
their income)
Quantity traded is less than competitive
Consumers are typically worse off (the marginal consumer is always worse off)Slide17
Rights Assignment 2: Lotteries
L
ucky search, historical accident, random draws
Price floor
lottery determines which suppliers get to produce
“unemployed” (a.k.a., “surplus suppliers”) are the lottery-losing suppliers
u
biquitous model in “modern” macro
Price ceiling:
lottery determines which demanders get to consume
“shortage” Slide18
A Lottery Allocating Goods to Buyers
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
S
WANT to trade
Price ceiling
RANDOMLY select
b
uyers so that their demand matches supply
400,000 lottery losersSlide19
Rights Assignment 2: Lotteries
quantity
traded depends on the price
regulation,
and not on any of the characteristics of the lottery (e.g., how many losers
) Slide20
A Lottery Allocating Goods to Buyers:
Quantity and price are
i
ndependent of demand
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
S
Price ceiling
D’
More than 400,000 lottery losersSlide21
Rights Assignment 2: Lotteries
Q
uantity
traded depends on the price
regulation,
and not on any of the characteristics of the lottery (e.g., how many losers
)
Quantity traded is less than competitiveSlide22
Rights Assignment 2: Lotteries
Q
uantity
traded depends on the price
regulation,
and not on any of the characteristics of the lottery (e.g., how many losers
)
Quantity traded is less than competitive
Consumer benefit from the ceiling is calculated with average benefit
If demand is less price elastic than supply, then price ceilings (plus lottery) cannot enhance aggregate consumer benefit
w
ith nonlinear demand, there is also a convexity termSlide23
A Lottery Allocating Goods to Buyers:
C
onsumer surplus and the Average Benefit curve
(also contradicts
Krugman
and Wells, and most other textbooks)
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
(a.k.a.,
MB
)
S
Price ceiling
AB
Low-value buyers added to the market.
AB(2.0) =1,300
AB(2.2) =
AB(1.8) =
Consumer surplus: unregulated
Consumer surplus: regulated
goods not supplied
l
oss: goods misallocated
Redistribution to consumers
Society loses
Consumer gain is less than the redistribution, and may be a net loss.Slide24
Allocation by Lottery
Market SimulationSlide25
Allocation by Lottery
Market SimulationSlide26
Allocation by Lottery
Market SimulationSlide27
Lotteries Followed by Resale:
An Application of the
Coase
Theorem
(also contradicts
Krugman
and Wells, and most other textbooks)
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
S
Price ceiling
Consumer surplus: regulated
H
igh-value lottery losers buy from low-value lottery winners.
Profit from resale (gross)
goods not supplied
Amount lost by society
Secondary market price
Lowest-value buyers participate too
More than 400,000 lottery losersSlide28
Rights
Assigment
3:
Nonprice
Competition
Most real-world goods have non-price attributes such as quality that are:
Valued by buyers
Costly for sellers to provide
Can be an object of competition absent price competition
Price floor
Sellers enhance non-price attributes to compete for buyers
Price ceiling
Buyers accept fewer non-price attributes
Examples: discrimination, in-kind compensation (OJT), serving size (food
), maintenanceSlide29
Creating more square feet with the same cubic feetSlide30
Non-price competition in response to controls
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
S
Price ceiling
What are the next-best alternatives represented here?Slide31
Nonprice
Competition
Supply of, and demand for, short (low head room) apartments.
0
.6
0
0
.8
1
.0
1
.2
1.4
$1,400
1,200
1,000
800
600
Quantity of
short apartments
(millions)
Monthly rent
(
per apartment)
Price ceiling
S
$800 ceiling = less opportunity cost
D
Supply curve reflects opportunity costs, including the opportunity of using the
same cubic footage for tall apartmentsSlide32
Nonprice
Competition
Large deviations from competition shift demand more than supply.
Unregulated supply and demand shown with dashes.
(also contradicts
Krugman
and Wells, and most other textbooks)
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
S
Price ceiling
S’
Savings on
nonprice
attributes
Less valuable product
D’Slide33
Nonprice
Competition
Small deviations from competition shift demand and supply equally.
Unregulated supply and demand shown with dashes.
(also contradicts
Krugman
and Wells, and most other textbooks)
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
S
Price ceiling
S’
D’Slide34
Nonprice
Competition
Equilibrium quantities for various ceilings.
Unregulated supply and demand shown with dashes.
(also contradicts
Krugman
and Wells, and most other textbooks)
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
S
Price ceiling
See also Summers “Mandated Benefits” Slide35
Rights
Assigment
3:
Nonprice
Competition
Q
uantity
traded depends
on both demand and supply.
E.g., despite a price floor, a tax on suppliers will reduce supply
Quantity effect is essentially zero in the neighborhood of the competitive outcome
(need to be clear on how quantity is defined)
Both consumers and producers are typically worse offSlide36
Queues 201
Wait time is a product attribute
Absent regulation, suppliers spend resources to reduce customer waitingSlide37
Is Customer Waiting Evidence of Waste?Slide38
Nonprice
Competition
Small deviations from competition shift demand and supply equally.
Unregulated supply and demand shown with dashes.
(also contradicts
Krugman
and Wells, and most other textbooks)
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D
S
Price ceiling
S’
D’Slide39
Queues 201
Wait time is a product attribute
Absent regulation, suppliers spend resources to reduce customer waiting
Quantity
traded depends on the price
regulation, the effect of queues on supply costs, AND
the characteristics of the
buyers
(e.g.,
their income)
Quantity traded is less than competitive
Consumers are typically worse off (the marginal consumer is always worse off)Slide40
Quality-Quantity Substitution
Sometimes quality and quantity are substitutes
Distinguish the aggregate number of units purchased from the aggregate consumer value of those units
E.g., square feet of apartment space vs. housing services
Price ceilings can
increase
the number of units purchased!Slide41
Nonprice
Competition
with a quality-quantity tradeoff.
Unregulated supply and demand shown with dashes.
(also contradicts
Krugman
and Wells, and most other textbooks)
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Housing services
Monthly rent
(
per apartment)
D
S
Price ceilingSlide42
Nonprice
Competition
with a quality-quantity tradeoff.
Unregulated supply and demand shown with dashes.
(also contradicts
Krugman
and Wells, and most other textbooks)
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Monthly rent
(
per apartment)
D
S
Price ceiling
Square feet of
apartments
(billions
)
Elasticity = -1Slide43
Who has the property rights?
Who determines how the good is made?
Who has the right to grant exemptions?
Who assigns the right to use
?
Buyer takes the good by
force:
conscription, taxation in kind
Seller decides, or it is part of the regulationSlide44Slide45
A Lottery Allocating Goods to Buyers:
C
onsumer surplus and the Average Benefit curve
1.6
0
1.8
2.0
2.2
2.4
$1,400
1,200
1,000
800
600
Quantity of apartments (millions)
Monthly rent
(
per apartment)
D = MB
S
Price ceiling
AB
Low-value buyers added to the market.
Their numbers depend on price elasticity of demand and the lottery chances.
Their numbers depend the lottery chances.
High-value buyers removed from the market.