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E-201.Study Guide Chapter6.Key Terms and Questions

E-201.Study Guide Chapter6.Key Terms and Questions -...

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95 6 GOVERNMENT ACTIONS IN MARKETS K e y C o n c e p t s A Housing Market With a Rent Ceilings The government might regulate a market. A price ceil- ing or a price cap is a government regulation that makes it illegal to charge a price higher than a specified amount. A price ceiling imposed above the equilibrium price has no effect. A price ceiling set below the equilib- rium price has major effects. A price ceiling imposed in a housing market is a rent ceiling . A rent ceiling prohibits charging rent that ex- ceeds the ceiling amount. Rent ceilings below the equi- librium rent creates a housing shortage. In Figure 6.1, in the absence of a rent ceiling the equilibrium rent is $750 per month and quantity of apartments is 3,000. With a rent ceiling of $500 per month, the quantity of apartments demanded in- creases to 4,000, the quantity of apartments sup- plied decreases to 2,000 and there is a shortage of 2,000 apartments. A shortage leads to: increased search activity — time spent looking for someone with whom to do business. black markets — an illegal market in which the price exceeds the legally imposed price ceiling. Rent ceilings create inefficiency and a deadweight loss. Figure 6.1 illustrates the deadweight loss created by a rent ceiling. The producer surplus shrinks to the trian- gular area shown in Figure 6.1. Tenants are willing to expend resources equal to the rectangular area in Figure 6.1 searching for an apartment. If they spend this amount of resources, the total consumer surplus shrinks to the triangular area indicated in Figure 6.1. Because rent ceilings block voluntary exchange, they are unfair according to the fair rules view of fairness. Rent ceilings do not necessarily allocate more apart- ments to the poorest. Instead they allocate apartments to those who are lucky, not to those who are poor. They also can lead to increased discrimination. So rent ceilings violate the fair results view of fairness. A Labor Market With a Minimum Wage A price floor is a government imposed regulation that makes it illegal to charge a price lower than the speci- fied level. A price flow set below the equilibrium price has no effect. A price flow set above the equilibrium price changes the market outcome. A price floor in a labor market is a minimum wage . A minimum wage makes hiring workers for less than the specified wage rate illegal. A minimum wage set above the equilibrium wage rate creates unemployment. In Figure 6.2 (on the next page), in the absence of a minimum wage the equilibrium wage rate is $7.50 per hour and quantity of hours is 3 million per year. C h a p t e r
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9 6 C H A P T E R 6 With a minimum wage of $10 per hour, the quan- tity of labor supplied increases to 4 million hours, the quantity of labor demanded decreases to 2 mil- lion hours and there is unemployment of 2 million hours of labor.
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