Chapter 6: Price Control 109

Some buyers at the price of $1.00 per gallon will not be willing to pay higher prices. $1.00 per gallon is their limit. These are called marginal buyers. The buyers who offer higher prices will be those who are willing to pay more than $1.00 per gallon to get gasoline. As prices rise, marginal buyers are driven out.

As you might expect, a quite similar phenomenon holds true for supply. Suppose that at a price of $1.00 per gallon, there are more sellers than buyers: more people are willing to sell at that price than are willing to buy. What will happen? (Before reading the next paragraph, see whether you can work out the analysis yourself.)

At the price of $1.00 per gallon, we suppose, some sellers will not find buyers. Some sellers will be willing to sell at a lower price: they would be better off disposing of the gasoline at less than $1.00 per gallon, than not being able to sell all their gasoline at the higher price. Others, the marginal sellers, will exit the market. If they cannot get at least $1.00 per gallon, they don’t want to sell gasoline.

Once again, the market matches buyers and sellers. At the new, lower price, say 80¢ per gallon (why not? it’s my example and I’m free to make up the figures), there are neither sellers nor buyers who cannot trade as they wish.

1.	The marginal buyers and sellers, we have said, are those	?
	who, given an unfavorable small change in price, prefer
	not to trade. By what standard is this assessed? Who
	determines that someone would be better off trading than

not trading?

ENTER THE VILLAIN

Unfortunately, the state sometimes refuses to let well enough alone. Suppose the state decides that the price of gasoline is “too

110 An Introduction to Economic Reasoning

high.” It imposes a price ceiling of $1.00 per gallon. It is illegal to charge more than this for gasoline. The market price, we suppose, is $1.30 per gallon.

What will happen? At the $1.00 per gallon price, more buyers than sellers exist. Not everyone who wishes to purchase gasoline can do so. The result is a shortage of gasoline.

If the free market were allowed to operate, the price would rise until the market price was reached. At $1.30 per gallon, the number of buyers and sellers would be equal.

?1. Extra-credit: Do cases exist in which a price ceiling will not cause a shortage?

CEILINGS AND SHORTAGES, CONTINUED

Oddly enough, the answer to the question just posed is yes. Suppose the price ceiling is higher than the market price. For example, the market price is $1.30 per gallon of gasoline and the government imposes a price ceiling of $1.60 per gallon. What will be the result?

That’s right, nothing at all. The price ceiling will not stop buyers and sellers from reaching the market price. Thus, we can say that a price ceiling will either be useless or cause a shortage.

?1. Why do you think that the government would ever impose a price ceiling above the market price?

Chapter 6: Price Control 111

YET ANOTHER COMPLICATION

As you have no doubt by this time discovered, I like complications. It is not always true that a price ceiling above the market price has no effect. Can you see why not?

Buyers and sellers care not only about prices now, but also about their estimates of future price changes. Suppose I think that the market price of gasoline, absent government interference, will rise from its present $1.30 to $1.65. My expectations of the price change may influence how I now act. If I think that the expected rise will be blocked by the price ceiling, my course of action may well be different. Fortunately, you don’t have to worry about this in introductory economics.

AND ANOTHER COMPLICATION

There is another case in which a price ceiling will not cause a shortage. Suppose, as before, that the government imposes a price ceiling of $1.00, when the market price is $1.30. A possible state of affairs is that preferences shift, so that the number of buyers and sellers match at $1.00 instead of $1.30. In other words, the ceiling induces shifts in preferences that “justify” it.

But we have only to mention this to see how unlikely this is to happen. Why would the government’s action have this effect? Once more, we should keep the main point in mind, (while not ignoring the complications). A price ceiling will either be useless or cause a shortage.

1.	Extra-credit: Can you work out a circumstance in which a	?
	price ceiling will induce a surplus (more sellers than buy-
	ers, at that price)?

112 An Introduction to Economic Reasoning

THE ETHICAL POINT

Price ceilings cause shortages; therefore, the government should not institute them. What could be more evident?

Well, the premise is true; the conclusion (in the author’s judgment) is also true. But the conclusion does not follow from the premise.

?1. Give other examples of arguments with true premises and a true conclusion, where the premises do not entail the conclusion. Note that in order to reason correctly, the conclusion must be validly deduced from the premises.

ETHICS CONTINUED

But wait a minute. Doesn’t the conclusion follow the premises? Surely, shortages are bad; and if a government program causes a bad state of affairs to happen, it is bad. Therefore, price ceilings are bad and the government ought to avoid them.

?1. Using the previous discussion, can you see why the new argument does not show that the conclusion follows from the previously stated premises?

EVEN MORE ETHICS

The answer should be obvious. The new argument does not show that the conclusion, the government shouldn’t impose price controls, follows from the original premises because we have added a new premise. What is it?