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chapter 6 econ notes

chapter 6 econ notes - Chapter 6 Government Actions in...

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Chapter 6- Government Actions in Markets - Price ceilings/cap are implemented by the government in order to make it illegal to charge above a specific level o price ceilings are only effective when set below equilibrium because it prevents the price from regulating quantities demanded and supplied if set above equilibrium it has no effect because it does not constrain the market forces (that cause it to go to equilibrium?) o this is most commonly used for rent... and is called a rent ceiling A rent ceiling set below equilibrium creates: A housing shortage: recall... that at equilibrium, the quantity supplied and demanded are equal, however below the point of equilibrium the quantity supplied is less than the quantity demanded creating a shortage... which is what the rent ceiling does. Through this, somehow quantity must be allocated among the frustrated demanders, one way of this is through increased search activity Increased search activity: any time spent looking for someone with whom to do business activity is called search activity... because the price is regulated and there is a shortage (in the case of a rent-controlled housing market) people spend alot of time looking through newspapers for housing ads, or anything that would aid them in finding housing o the opportunity cost is not only equal to the price, but also the value of search time spent finding the good, therefore opportunity cost of housing is equal to rent (a regulated price)+time and the other resources such as phone calls, gasoline, etc that could have been used in other ways note: rent ceiling only controls the rent portion of the cost of housing, the cost of increased search activity may actually cause the full cost of housing higher than it would be without the rent ceiling a black market: rent ceilings also encourage illegal trading in a black market (an illegal market in which the equilibrium price exceeds the price ceiling)... black markets can occur for other markets... such as ticket scalpers running a black market in tickets for big sporting events and rock concerts o when rent ceiling is in force, frustrated renters/landlords constantly seek ways of increasing rents
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such as making new tenant pay high price for worthless fittings such as $2000 for threadbare drapes... or money for a lock called “key money” o level of black market rent depends on how tightly the rent ceiling is enforced, with loose enforcement, the black market rent is close to unregulated rent, but with strict enforcement, the black market rent is equal to the maximum price that a renter is willing to pay - Inefficiency of a Rent ceiling o Rent ceiling set below equilibrium results in an inefficient underproduction of housing and services Marginal social benefit from housing exceeds the marginal social cost and a deadweight lost shrinks the producer surplus and consumer surplus REFER TO P. 131 FIG 6.2 AND DESCRIPTION ABOVE - Are rent ceilings fair?
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chapter 6 econ notes - Chapter 6 Government Actions in...

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