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Economic Rent and Describe the

If regulation upon the monopoly did not exist, the monopolist could charge whatever price it desired, so long as people did not stop buying the product altogether. A monopoly means that a company has no rivals in the market producing the same or a similar product and there are few comparable goods and services that act as substitutes. For a necessary good or service (such as transportation or utilities) the effects upon consumers can be potentially devastating, without price ceilings curtailing the monopolys ability to charge high prices and ration its supplies.

To replicate a competitive market the price ceiling must reflect the natural equilibrium price, taking into consideration current demand and supply and reflecting the costs of production. However, this can be extremely difficult to institute, given that equilibrium price reflects micro-level changes and readjustments to shifts in supply and demand that the government cannot immediately take into account (Rockoff 2008). Usually, price ceilings are set below market equilibrium, and when price ceilings are too low, there is a disincentive for producers to meet current levels of demand, and shortages ensue.

The government is often forced to introduce rationing to ensure consumers needs are met (especially with necessities such as bread and gas). A black market often arises as a result, or producers illegally ask for bribes from consumers wishing to obtain the rationed goods. But if price ceilings are set too high, people will fail to buy the good or service, and a surplus will ensue. Although for necessary goods this is rare, if the ceiling is too high people may be creative in finding ways to substitute the good or service.

References

Economic rent. (2011). The Economist. Retrieved February 24, 2011 from the World Wide Web:

http://www.economist.com/research/Economics/alphabetic.cfm?letter=R

Rockoff, Hugh. (2008). Price controls. The Concise Encyclopedia of Economics.

Library of Economics and Liberty. Retrieved February 24, 2011 from the World Wide

Web: http://www.econlib.org/library/Enc/PriceControls.html.

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