KW_Macro_Ch_04_Sec_01_Price_Ceilings

KW_Macro_Ch_04_Sec_0 - chapter 4 > The Market Strikes Back Section 1 Price Ceilings Aside from rent control there are not many price ceilings in

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>> The Market Strikes Back Section 1: Price Ceilings chapter 4 Aside from rent control, there are not many price ceilings in the United States today. But at times they have been widespread. Price ceilings are typically imposed during crises—wars, harvest failures, natural disasters—because these events often lead to sudden price increases that hurt many people but produce big gains for a lucky few. The U.S. government imposed ceilings on many prices during World War II: the war sharply increased demand for raw materials, such as aluminum and steel, and price controls prevented those with access to these raw materials from earning huge prof- its. Price controls on oil were imposed in 1973, when an embargo by Arab oil- exporting countries seemed likely to generate huge profits for U.S. oil companies. Price controls were imposed on California’s wholesale electricity market in 2001, when a shortage was creating big profits for a few power-generating companies but leading to higher bills for consumers. Rent control in New York is, believe it or not, a legacy of World War II: it was imposed because the war produced an economic boom, which increased demand for apartments at a time when the labor and raw materials that might have been used to build them were being used to win the war instead. Although most price controls were removed soon after the war ended, New York’s rent limits were retained and gradually
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extended to buildings not previously covered, leading to some very strange situations. You can rent a one-bedroom apartment in Manhattan on fairly short notice—if you are able and willing to pay about $1,700 a month and live in a less-than-desirable area. Yet some people pay only a small fraction of this for comparable apartments and oth- ers pay hardly more for bigger apartments in better locations. Aside from producing great deals for some renters, however, what are the broader consequences of New York’s rent control system? To answer this question, we turn to a model for supply and demand. Modeling a Price Ceiling To see what can go wrong when a government imposes a price ceiling on a competi- tive market, consider Figure 4-1, which shows a simplified model of the market for apartments in New York. For the sake of simplicity, we imagine that all apartments are exactly the same and would therefore rent for the same price in an uncontrolled market. The table in the figure shows the demand and supply schedules; the implied demand and supply curves are shown on the left of the diagram. We show the quan- tity of apartments on the horizontal axis and the monthly rent per apartment on the vertical axis. You can see that in an unregulated market the equilibrium would be at point E : 2 million apartments would be rented for $1,000 each per month. Now suppose that the government imposes a price ceiling, limiting rents to a price
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_04_Sec_0 - chapter 4 > The Market Strikes Back Section 1 Price Ceilings Aside from rent control there are not many price ceilings in

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