ECO105Y1 Lecture Notes - Lecture 6: Working Poor, Living Wage, Equal Opportunity
Document Summary
When governments x prices, the smart choices of consumers and businesses are not coordinated. Quantities adjust to whichever is less be it quantity supplied or quantity demanded. When price is xed below the market-clearing price shortages develop (quantity demanded>quantity supplied), consumers are frustrated, and quantity sold=quantity supplied: this is an example of a minimum wage. When price is xed above the market-clearing price, surpluses develop (quantity supplied>quantity demanded), businesses are frustrated, and quantity sold=quantity demanded. Governments can x prices, but they cant forces business or consumers to produce or buy at the xed price: businesses can reduce output or move resources elsewhere, consumers can reduce purchases or buy something else. Rent controls x rents below market-clearing levels, and quantity adjustments take the unintended form of apartment shortages. Alternative policies to help the homeless that do not sacri ce market exibility are government income subsidies and government-supplied housing.
