Chap5 - Krugman and Wells Chapter 5 Steven J Haider EC201...

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Krugman Krugman and Wells and Wells Chapter 5 Chapter 5 Steven J. Haider EC201 Spring 2010
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EC201-5-p2 Overview Overview Recall from Chap. 3 we learned how competitive markets work Recall from Chap. 4 we learned that competitive markets are efficient This chapter: we examine two types of market interventions Price controls (floors and ceilings) Quantity controls Both will lead to inefficient outcomes Caution: we’re now using our supply/demand model, which will only make sense if you know how the model works. Do problems !
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EC201-5-p3 Rental controls Location, location, location $700/month, but worth $1400/month Other facts $2000 showing fee Changes January 1999 2 apartments available in June 3 interviews Neighbors Keep apartment? Rent control: Santa Monica 1998 Rent control: Santa Monica 1998
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EC201-5-p4 Price controls Price controls Price ceiling : a restriction on the maximum price allowed Example: rent control Example: wage controls during WW II (gave rise to firm- provided health insurance ) Price floor : a restriction on the minimum price allowed Example: minimum wage (the price of labor in the labor market) Example: some agricultural programs (guaranteed price on a commodity) Both of these actions are market interventions , perhaps with certain intended consequences. As economists who think about markets, we can predict consequences more generally…
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EC201-5-p5 Price ceiling example: rent control Price ceiling example: rent control If the market were competitive, we would expect the equilibrium price/quantity: $1000/month and 2.0m units
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EC201-5-p6 Price ceiling example: rent control Price ceiling example: rent control Suppose price ceiling of $800/month Predicted outcome: $800/month and 1.8m units Demand is 2.2m units, implying a housing shortage of 400,000 Suppose a price ceiling of $1200/month Predicted outcome: $1000/month and 2.0m units This price ceiling is not binding
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EC201-5-p7 Price ceiling example: rent control Price ceiling example: rent control Other effects 1: inefficiently low quantity Competitive equilibrium is efficient—so price ceiling causes
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This note was uploaded on 05/18/2010 for the course ECONOMIC Ec 201 taught by Professor Haider during the Spring '10 term at MSU - Iligan Inst of Tech.

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Chap5 - Krugman and Wells Chapter 5 Steven J Haider EC201...

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