Title: Price Floors and Ceilings
Headings: 5.4
Price Floors and Ceilings

5.4 Price Floors and Ceilings
Learning Objective
Key Takeaways
Exercises

Content: In addition to the misallocation of resources (too few units and units not allocated to those who value them the most), price ceilings tend to encourage illegal trade as people attempt to exploit the prohibited gains from trade. For example, it became common practice in New York to attempt to bribe landlords to offer rent-controlled apartments, and such bribes could exceed $50,000. In addition, potential tenants expended a great deal of time searching for apartments, and a common strategy was to read the obituaries late at night when the New York Times had just come out, hoping to find an apartment that would be vacant and available for rent. An important and undesirable by-product of price ceilings is discrimination. In a free or unconstrained market, discrimination against a particular group, based on race, religion, or other factors, requires transacting not based on price but on another factor. Thus, in a free market, discrimination is costly—discrimination entails, for instance, not renting an apartment to the highest bidder but to the highest bidder of the favored group. In contrast, with a price ceiling, there is a shortage; and sellers can discriminate at lower cost, or even at no cost. That is, if there are twice as many people seeking apartments as there are apartments available at the price ceiling, landlords can “pick and choose” among prospective tenants and still get the maximum legal rent. Thus, a price ceiling has the undesirable by-product of reducing the cost of discrimination.