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Presentation8 - TheMarketStrikesBack...

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The Market Strikes Back (or what happens when you mess  with market outcomes)
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The meaning of  price controls  and  quantity  controls , two kinds of government interventions in  markets. How price and quantity controls create problems  and can make a market inefficient. What  deadweight  loss is. Who benefits and who loses from market  interventions, and why they are used despite their  well-known problems. What you will learn in this chapter
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The market price moves to the level at which the quantity supplied equals the quantity demanded. BUT this equilibrium price does not necessarily please either buyers or sellers. Therefore, the government intervenes to regulate prices by imposing price controls , which are legal restrictions on how high or low a market price may go. Price ceiling is the maximum price sellers are allowed to charge for a good or service. Price floor is the minimum price buyers are required to pay for a good or service.
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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. Examples: U.S. Government imposed ceilings on aluminum and steel during World War II Rent control in New York
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1.6 0 1.8 2.0 2.2 2.4 $1,400 1,200 1,000 800 600 Quantity of apartments (millions) Monthly rent (per apartment) D S E B A Housing shortage of 400,000 apartments caused by price ceiling Price ceiling
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Search: favors those with low opportunity cost of  time. Queues: first come–first served Rationing Seller’s preferences lottery Black markets
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Inefficiently Low Quantity Inefficient Allocation to Customers Wasted Resources Inefficiently Low Quality Black Markets
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1.6 0 1.8 2.0 2.2 2.4 $1,400 1,200 1,000 800 600 Quantity of apartments (millions) Monthly rent (per apartment) D S E Deadweight loss from fall in number of apartments rented Price ceilin g Quantity supplied with rent control Quantity supplied without rent control
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Winners, Losers and Rent Control Price controls create winners and losers: In 2005,Cyndi Lauper paid $989 a month for an apartment  that would have been worth $3,750 if unregulated. Mia Farrow’s apartment, which, when lost its rent-control 
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This note was uploaded on 12/07/2009 for the course ECON 211 taught by Professor Na during the Fall '08 term at Rice.

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Presentation8 - TheMarketStrikesBack...

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