# Effects of Government Regulation on Demand and Supply

A government can impose various restrictions that will lead to an imbalance in the quantity and price equilibrium resulting in a deadweight loss.

These interventions include:

• Price ceilings and price floors
• Minimum wages
• Subsidies and Quotas

### Price Ceilings

A price ceiling is the highest price at which it is legal to trade a particular good or service.

Assume that the demand and supply of housing determines the equilibrium rent of $550 a month and the equilibrium quantity of 4,000 units of housing. The following graph shows the efficient housing market with maximum consumer and producer surplus. Suppose the government imposes a rent ceiling of$400 per month which is below the equilibrium price. As a result the following changes happen.

1. Rent ceiling restricts quantity supplied. Supplied quantity is 3000 and quantity demanded is 6000. Shortage of 3000 units.
2. Rent ceiling creates a black market. Some people will be willing to pay $625 per month for a house. 3. Resources get used in costly search activity including both time and cost. 4. A dead weight loss arises. ### Price Floor A price floor makes it illegal to pay a price lower than a specified level. An example of price floor is minimum wage. Let’s say the equilibrium wage rate per hour is$5 at the equilibrium quantity of 5000 workers.

Minimum wage is imposed at $7 per hour. The graph will change as follows: 1. The minimum wage restricts the quantity demanded by the firms. At$7 per hour, only 3000 jobs are available.
2. People will find it hard to find jobs, and some people will be willing to take a job at lower rate. Someone will be ready to take a job at $3 per hour also. Illegal wage rates will range from$3 to below \$7.
3. The firms’ surplus and the workers’ surplus shrinks.
5. Other resources are used up in job search activity.

### Taxes

Taxes will increase the equilibrium price and decrease the equilibrium quantity, creating a deadweight loss.

### Production Quotas

A production quota is an upper limit to the quantity of a good that may be produced in a specified time period.

With a production quota, the quantity decreases, the consumer surplus shrinks, the producer surplus expands, and a dead weight loss arises.

### Subsidies

Subsidies are payments made by governments to producers such as farmers. Subsidies lower the prices paid by buyers and increase the prices received by sellers. With a subsidy, the quantity increases, and a dead weight loss arises due to overproduction.