8 Price Ceilings and Floors

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CHAPTER OUTLINE

Price Ceilings

Rent Controls (Optional Section)

Arguments for Price Ceilings

Universal Price Controls

Price Floors

Takeaway

On a quiet Sunday in August of 1971, President Richard Nixon shocked the nation by freezing all prices and wages in the United States. It was now illegal to raise prices—even if both buyers and sellers voluntarily agreed to the change. Nixon’s order, one of the most significant peacetime interventions into the U.S. economy ever to occur, applied to almost all goods, and even though it was supposed to be in effect for only 90 days, it would have lasting effects for more than a decade.

In Chapter 7, we explained how a price is “a signal wrapped up in an incentive”; that is, we explained how prices signal information and create incentives to economize and seek out substitutes. We also explained how markets are linked geographically, across different products, and through time. In this chapter, we show how price controls—laws making it illegal for prices to move above a maximum price (price ceilings) or below a minimum price (price floors)—interfere with all of these processes. We begin by explaining how a price control affects a single market, and then we turn to how price controls delink some markets and link others in ways that are counterproductive.