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Price Controls - Ceilings and Floors

Summary: Students trade in an experimental market with and without a price ceiling or a price floor. This experiment can be used to illustrate how price, quantity supplied, quantity demanded, consumer surplus and producer surplus change as the price control is instituted. Price controls can be set to be binding or not. These experiments can be conducted on EconPort in the classroom or outside of classroom time. Results are discussed in lecture.

Motivation: Most students have difficulty understanding the concept of a binding price ceiling or price floor and the disequilibrium effects on quantity supplied and demanded. This module offers pre-set experiments that can be run to illustrate these concepts. Subjects learn on their own how the introduction of a price ceiling or floor changes the quantity traded and the surplus that the consumer and producer receives. Lecture materials, including student instructions, pre-experiment and post-experiment discussion, follow.

Concepts Covered:

  • A price ceiling is the maximum price that can be charged.
  • A price floor is the minimum price that can be charged.
  • An effective (or binding) price floor is one that is set above equilibrium price.
  • An effective (or binding) price ceiling is one that is set below equilibrium price.
  • Effective price ceilings and floors create dead-weight loss.
  • An effective price floor creates a surplus and benefits suppliers.
  • An effective price ceiling creates a shortage and benefits consumers.

Experiments

Experimental Materials:

  • Professor Instructions & Guidance
  • Student Instructions
  • Pre-experiment discussion
  • Post-experiment discussion

Pre-set Experiments to Run:
  • Experiment 1: Introduction of a binding price ceiling below equilibrium price, also illustrates a non-binding price ceiling and a baseline case without a price ceiling.

  • Experiment 2: Introduction of a binding price floor above equilibrium price, also illustrates a non-binding price floor and a baseline case without a price floor.

Class Discussion

Lecture Notes

  • Price ceiling example
  • Price floor example

 
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