Ch 6 and 8 Price Controls and Taxes

Ch 6 and 8 Price Controls and Taxes - Chapters 6, 8 Supply,...

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Chapters 6, 8 Supply, Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Government Policies
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Recall: In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. hile equilibrium conditions may be Copyright © 2006 Nelson, a division of Thomson Canada Ltd. While equilibrium conditions may be efficient, it may be the case that not everyone in society is satisfied and the government may want to get involved. Now we’ll look at government policies and how they affect supply and demand.
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Price Controls are usually enacted when policymakers believe the market price is unfair to buyers or llers. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. sellers. The government will freeze prices at a predetermined level that they feel will make members of society better off.
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Price Ceilings A price ceiling is a legal maximum on the price at which a good can be sold. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. The price ceiling is not binding (not effective) if it is set above equilibrium price. The price ceiling is binding (effective) if set below equilibrium price, leading to a shortage.
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Example: Rent Control he government’s goal: to help the poor by Copyright © 2006 Nelson, a division of Thomson Canada Ltd. The government’s goal: to help the poor by making housing more affordable. It sets a maximum price (rent) for housing that is below equilibrium price.
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In the SR, the number of apartments is fixed, so Supply of housing is inelastic. otential renters may not be highly responsive to Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Potential renters may not be highly responsive to rents because they take time to adjust their housing arrangements (eg. give notice to current landlord), so Demand for housing in the SR is relatively inelastic.
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Rent Control in the SR Rental P of Housing S Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Q of Apartments
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Rental P of Housing S Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Q of Apartments D
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Rental P of Housing S Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Q of Apartments D Rent control P
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Rental P of Housing S Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Q of Apartments D Rent control P
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Rental P of Housing S Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Q of Apartments D Rent control P shortage
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In the LR, low rents can mean that landlords may convert to condos, get out of the rental usiness and/or won’t maintain existing Copyright © 2006 Nelson, a division of Thomson Canada Ltd. business and/or won’t maintain existing apartments, so Supply is elastic. Low rents encourage people to look for housing
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This note was uploaded on 09/16/2011 for the course ECON 101 taught by Professor Unknown during the Spring '10 term at University of Toronto- Toronto.

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Ch 6 and 8 Price Controls and Taxes - Chapters 6, 8 Supply,...

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