Price Floors

… a core concept in Economic Analysis and Atlas102

Concept description

Alex Tabarrok (reference below, video on right), describes the four major unintended consequences of government-regulated price floor (a minimum price allowed by law).

Four effects of price floors

Tabarrok sets out the four major unintended consequences of price ceilings. Note that they tend to be the mirror images of the unintended consequences of Price Ceilings.

Price floors create:

1. Surpluses
2. Lost gains from trade (deadweight loss)
3. Wasteful increases in quality
4. A misallocation of resources

Analysis of these four effects is conducted for the examples of Minimum Wage and Regulated Airline Fares.

Why price floors are less common than price ceilings

Tabarrok notes that price floors are less common than price ceilings and suggests that the reason is likely to be politics – for most goods, there are more buyers (and thus voters) than sellers. The one exception that proves the rule is the good of labour, where there are more sellers (employees) than buyers (employers). And the price floor policy associated with labour is the Minimum Wage.

Atlas topic, subject, and course

The Price System and Price Regulation (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

Alex Tabarrok, Price Floors (first 2:30 of 10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/rent-controls-economics, accessed 1 May 2016.

Page created by: Ian Clark, last modified 1 May 2016.

Image: Alex Tabarrok, Minute 0:13 of Price Floors, Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/rent-controls-economics, accessed 1 May 2016.