efficiency costs

efficiency costs - Efficiency Costs of Policies Deadweight...

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1 Efficiency Costs of Policies • Deadweight loss: reduction in total economic surplus that results from the adoption of a policy. • E.g. Price ceilings, price floors (minimum wages), subsidies, taxes Example: a price ceiling on heating oil P Q (thousands) 2.00 0.80 1.00 1.40 3 2 1 D S Example: a price ceiling on heating oil P 2.00 0.80 1.00 1.40 3 2 1 D S Producer surplus = $900 Consumer surplus = $900 Q (thousands) Example: a price ceiling on heating oil P 2.00 0.80 1.00 1.40 3 2 1 D S Producer surplus = $100 Consumer surplus = $900 Lost surplus = $800 Q (thousands) Housing Markets and Rent Ceilings Because the legal price cannot eliminate the shortage, other mechanisms operate: • Search activity • Black markets Housing Markets and Rent Ceilings • Black Markets – A black market is an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed. – A shortage of housing creates a black market in housing. – Illegal arrangements are made between renters and landlords at rents above the rent ceiling—and generally above what the rent would have been in an unregulated market.
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2 Housing Markets and Rent Ceilings • Inefficiency of Rent Ceilings – A rent ceiling leads to an inefficient use of resources. – The quantity of rental housing is less than the efficient quantity, so a deadweight loss arises. Housing Markets and Rent Ceilings – A rent ceiling decreases the quantity of rental housing. People use resources in search activity, which decreases producer surplus and consumer surplus. And a deadweight loss arises. The Labor Market and Minimum Wage • A Minimum Wage – A price floor is a regulation that makes it illegal to trade at a price lower than a specified level. – When a price floor is applied to labor markets, it is called a minimum wage . – If the minimum wage is set below the equilibrium wage rate, it has no effect. The market works as if there were no minimum wage. – If the minimum wage is set
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This note was uploaded on 04/13/2008 for the course ECON 1 taught by Professor Tang during the Spring '08 term at UCSD.

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efficiency costs - Efficiency Costs of Policies Deadweight...

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