The Concepts of Price Ceilings and Price Floors - Essay Example

Introduction Due to the trade offs in the consumer decisions in purchase, the limited income with numerous choices of products and services ready to be purchased in the market, the consumers must combine budget constrains and the preferences (Case, et al, 2008). The budget constrains are determined by the relative prices of goods /services and the consumer income, frequent rises and falls in prize directly impacts on the consumers either directly or indirectly (Fajnzylber, 2009). The government, having realize this, put in place measures to control the over pricing and the under prizing which do not only affects the consumers but also the producers for example the farmers. The increasing prizes of the farm inputs affects the prizes of the farm produce, if the market prizes are low then they are likely to get into losses after the heavy investment on the inputs, hence low returns. With the use of price ceilings and floors, the government restricts the prizes to maintain the market. Price ceilings This is the maximum prize imposed by the government on products, which is intended to stop the prize from going beyond the consumer expectation; this allows the consumers to be in a position to buy the products and services. However, prize sealing can result into product, services rationing, and shortages (Case, et al, 2008). The sealed price is ret below the equilibrium price and could not be altered by the market demand or force. If the prize sealing is imposed on products by the government is high above the equilibrium price, then the sealed prize will have no impact on the economy. This will negatively impact on the citizens, as they will bare the hefty prizes that ought to have been controlled below the equilibrium prize to allow the product and service consumers benefit from the ceiling. Equilibrium prize This is the prize at which the quantity supplied is equal to the quantity demanded creating an equilibrium prize where the force in the market have no effect in either demand or supply at the equilibrium prize. If the price ceiling were below the market prize then it would not be noticed immediately (Fajnzylber, 2009). The market force will have to first have to increase the market price, then from there is when the ceiling will be determined (Case, et al, 2008). The ceiling will never be below the market prize meaning that its impacts will be felt, however it is to the benefit of the consumers when the ceiling is below the market price as the products and services will be cheaper. When the ceiling is above the market prize then nobody would realize since market prize is below the ceiling, instead, consumers will resort to the normal situation of the market, which is expensive (Nash, 2007). Hence increased cost of living, this will lower the living standards, as most people will not be able to afford the basic human needs namely food, clothes and shelter. Inflation is an example where the price ceiling is well explained, the government legally imposes laws to control the price of important, and basic commodities so tat he common citizen mat be able to afford (Mankiw, 2008). In addition, the concert and sporting event ticket prices are often controlled and maintained below the equilibrium prizes, the scalping prohibiting laws then imposed price ceiling. Scalping of course in itself is an ineffective practice. Price floors This is the government imposed minimum prize at which the products and services are permitted to sell and to be sold (Hoffman, et al, 2008). Generally, most of the agricultural products and services fall in this category, other regulatory bodies may also impose price floors on goods and services fro example, and the labor union imposing the minimum amount a worker can get for a given job per hour (Case, et al, 2008). With the price floors higher than the equilibrium prizes, then there will be more units supplied than the demand in the market hence surplus production. At the price floor a lager quantity is brought the market with respect p the quantity demanded. Some units are socially efficient to trade but cannot be traded being that their values are below the prize floor. The lost gain from trade associated with such products, which is due to the prize floor, is referred to as dead weight loss (Hirshleifer, et al, 2005). Generally, other losses would be realized given that the suppliers who do not produce also do not sell. Some suppliers who will not be able to sell in the end may still be able to produce basing their argument on the fact that they will be able to sell. However, the additional costs (the dead weight losses) will be in large figures comparatively to the reflected costs (Hirshleifer, et al, 2005). Increase in prize due to the prize floor will tentatively increase the buying prize when the demand is inelastic or otherwise it will lead to prize reduction, thus hen the imposed prize floor is to be for the benefit of the sellers then the expected prize increase should not be to an extent that the demand becomes elastic. However, if the demand becomes elastic it means that the sellers will have less revenue. For example; if there is a minimum wage imposed in order to increase the average wages of the low skilled workers, then the would be expectation that he average wages of the low skilled income rise. However, if the aim of motivation of the minimum wage is basically to make the low skilled workers ineffective substitutes for the workers union, which in turn allows the union workers to increase their demand wages, then, the observable minimum wages that is in real sense higher than the expected low skilled workers benefits. Why do governments sometimes use price ceilings and price floors? The government imposes the ceiling and the floor prized to keep and control prizes of essential commodities, which reduces the shortage other products and services within the local market. The commodities that are prized lower than the equilibriums prizes are supposed to be raised and the ones that are prized above the equilibrium prizes are supposed to be lowered to balance the market between the b businesspersons and the consumers (Hirshleifer, et al, 2005). For example, when the government sets the prize floors, which will lead to surplus production, that is for example the farmers can sell in the market which would not be the case should the floor [prizes fall below the equilibrium prize. When the prizes fall below the equilibrium prize, the farmers would greatly incur heavy losses due to the technology and the improved farm inputs that are very costly. Failure for the government to keep the prize of the farm[products many farmers would abandon farming being that it only leads to heavy losses after investing on the expensive farm inputs (Case, et al, 2008). With the lower farmers morale, the gross total agricultural production will fall, this will affect the food prizes in the market leading to dependency on food supply from other countries while our country have the potential to feed its citizens. The government efforts to impose the floors and ceiling prizes really help in boosting the income for the small farmers to keep them working. However, prize floor and ceilings are not only used in agriculture (Pardey & Smth, 2004). The government may use for instance many jurisdictions mandate on minimum prizes in the establishment of license to be charged for alcohol beverage as an effort to regulate and stop over consumption, however, the process need to be controlled not to be either on the high or the lower as both situations have side effects on the alcohol consumption . For example, if the prizes of alcohol become too low then many people will resort to drinking, this will lower the country’s labor productivity (Kazmer & Konrad, 2004). The higher prizes also negatively affects the production, in that the alcohol consumers will resort to the cheap liquor that in many cases are not brewed to the required standards and quality. This may physically affect the consumers health status, lower the production and also increases crime rates as the addicted consumers will try to obtain what belongs (rob) to others in order to satisfy theory urge. Effects of prize ceiling and floors on resource allocation An important by- product of the prize ceiling and prize floors is discrimination against particular groups of individuals. For example, in a case where the government regulates the prize of commodities like, rental houses, some people may come up with issues that deny other people the chance to freely and unconditionally participate in either the rental and or buying the premises (Case, et al, 2008)). The property owners prefer considering the wealthy celebrities who will not delay to pay the rental dues, which is a disgrace to the poor and the middle class dwellers. However, on the consumers’ side, there are cases that would lead to the emergence of black markets. The case where the government imposes the prize ceilings and floors (Fajnzylber, 2009). On the hard drugs, they nay report to obtaining the services and products from smuggles who offer better and d fairly cheap prizes comparatively to the government regulated market prize. To some people, it may be a source of corruption (Hoffman, et al, 2008). Black-market. You may have to pay heftily to get a product that is controlled otherwise the owners keep the products until the prizes favor them. The reduction in quality, with the reduction in prizes, the quality also reduces due to the high cost of raw materials involved (Kazmer & Konrad, 2004). When the producers realize reduced process they will not bother on the quality, it doe not make sense highly invest in a product that will later have negative impacts on the overall income (Case, et al, 2008). The service providers also tend to follow suit, in marketing no one will comfortably work while anticipating negative impacts of the business. Conclusion The ability to pay taxes and the benefit are the principles the government confirms before they levy the taxes on the produces and the consumers in order to regulate the availability and use of the product and services in the market. However, the ceilings and floors either negatively or positively imparts on the producer and consumer surplus. For example, the price floors are tax on consumer and subsidy on the producer while the prize ceilings transfers the surplus of production to the consumer meaning that they are subsidy to consumers and a tax to producer. The consumer’s surplus is the only consumer’s net benefit got from the purchase of gods and services while the benefit that the producers get from the sale of goods is refereed to as the producer surplus. The government taxes levied on the products and services creates a loss to producers and consumers referred to as the deadweight loss, which is represented graphically through the triangle of the welfare loss. References Case, K., Fair, R. & Oster, S. 2008. Principles of Microeconomics, 9th Ed. New York: Prentice Hall. Fajnzylber, P. 2009. Business & Economics. Cambridge: Cambridge University Press. Hirshleifer, J., Glazer, A., Hirshleifer, D. & Hirshleifer, D. 2005. Price theory and applications: decisions, markets, and information. Cambridge: Cambridge University Press. Hoffman, W., Smith, J. & Willis, E. 2008. South-Western Federal Taxation 2009: Individual Income Taxes 32nd Ed. London: Cengage Learning. Kazmer, D. & Konrad, M. 2004. Economic lessons from the transition: the basic theory re-examined. New York: M.E. Sharpe Mankiw, G. 2008. Principles of Economics, 5th Ed. London: Cengage Learning. Nash, J. 2007. Agriculture and state- Developing countries, Ed. Illustrated: Washington, DC Pardey, P. & Smth, V. 2004. What's economics worth? valuing policy research. New York: Johns Hopkins University Press. Read More