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Chapter 6 - Government Actions in Markets.docx

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ECON 101
Corey Van De Waal

Chapter 6 Government Actions in Markets A housing market with a rent ceiling Price ceiling or price cap is a regulation that makes charging a price her than a specified level is illegal Rent ceiling is a price ceiling applied to a house marketIf set above the equilibrium rent market works as if there were no ceilingIf set below the equilibrium rent it influences the market On the image to the left the equilibrium rent is illegal as it is above the set rent ceiling At the rent ceiling the quantity of house demandedquantity of houses supplied Therefore there is excess of demand or a shortage of housingAt the equilibrium rent the legal price does not eliminate the housing shortage to the demand therefore it causesIncreased search activityA black market According to the image because the ceiling rent places the legal price at 800 landlords are providing only 60000 units of housing With the shortage someone is willing to pay a maximum of 1200Increased search activity Search activity is the time spent looking for someone to do business withit increases when a price is regulated and a shortage happensCostlyOpportunity cost of housingrent regulatedopportunity cost of the search activity unregulatedOpportunity cost of housingexceeded rent because quantity of housing in a regulated marketquantity of housing in an unregulated market Black market Black market is an illegal market operating next to a regulated legal market Illegal arrangements are made between renters and landlords at prices above the rent ceilinggenerally above what the rent would have been in an unregulated market Inefficiency of a rent ceiling Rent ceiling set below the equilibrium rent causes inefficient underproduction of housing Marginal social benefit of housing servicesmarginal social costdeadweight lossAccording to the image on the left a rent ceiling decreases quantity supplied to less than the efficient quantity This creates
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