The Credit Card Loan Market

Wrong! - A price floor sets a legal minimum price, not a legal maximum price.  A production quota on the credit card loan market will limits the number of loans, not the interest rate. Deregulation removes government controls. This policy adds a government price control.

Wrong! - An interest-rate ceiling set below the equilibrium rate is binding and does lower the legal cost of borrowing. If an interest-rate ceiling is set above the equilibrium interest rate, it is non-binding. Lenders are already charging less than the legal maximum, so the law has no effect.

Wrong! - An upward interest-rate adjustment is prevented by price-ceiling, so market forces cannot eliminate the shortage. A surplus arises under a binding price floor, not under a price ceiling. Interest-rate adjustment is prevented by price controls, so market forces cannot neither eliminate a surplus or a shortage.

Wrong! - A binding price ceiling reduces the quantity traded below the efficient quantity, not above it. This policy prevents the market from reaching the efficient quantity. Overprovision of credit reduces total economic welfare.

Wrong! - Those who apply first are not necessarily the first to receive a loan. The market price mechanism is blocked by the legal maximum interest rate. Majority rule is used to make public decisions, not to allocate private credit.

Wrong! - In the fair-results view, an outcome is unfair if it makes low-income people worse off, which this policy does. In the fair-rules view, an outcome is unfair when rules prevent voluntary exchange, which happens here.

Wrong! - Lenders are not required once the price ceiling is imposed. They can refuse to lend. The problem is a shortage of credit, not affordability. An illegal market arises when many borrowers face a shortage and turn to it. A surplus implies too few borrowers, leaving no basis for an illegal market.

Wrong! - If lenders were willing to lend below 10 percent, they could do so legally and would not need to operate illegally. Illegal markets exist precisely because the legal ceiling does not apply to them. Illegal-market interest rates cannot fall below the ceiling; they must lie above it.