ECO 1104 B Oct 22 , 2013
YUJIE YI #738840
Chapter 6 Supply, Demand, and Government Policies
DifferentApplications
Price ceilings
- Rent control
Price floors
- Minimum wage
- Agricultural price supports
Incidence of an excise tax
- How much revenue will it raise?
- Who bears the true burden?
Price Ceilings
This is a regulated price designed to protect the interests of consumers
The government dictates a maximum price for a commodity
Example – rent control laws (Figure 6.3)
1 /7 - Government decides that rents aren’t “fair”
- It intervenes in the housing market to provide affordable housing
If the price ceiling lies below the equilibrium rent, a situation of excess Qd for
housing emerges
Price decreases, quantity supplied decreases
- Developers stop building
- Landlords cease to maintain units
Price decreases, quantity demanded increases
The shortage causes upward pressure on rents, and other perverse effects
- Other perverse effects: Outrageous parking and key charges
Another recent and important example
Quebec Universities are being squeezed as tuition and grants are almost
frozen
- Not even adjusted for inflation
Fairly high cost pressure exists, especially on salaries and maintenance of IT
This means that quantity supplied (especially on a per-student basis) is
falling, at least in terms of the quality of education ECO 1104 B Oct 22 , 2013
YUJIE YI #738840
So the university tries to find other ways of raising revenue, sometimes by
nickelling and diming its students
- These unpopular policies may be annoying, but it is extremely rational
from an economics perspective
Aprice ceiling is ineffective unless it is below the equilibrium price
Price Floor
Again, the market generates a price which offends our sense of “social justice”.
This time, the price is so low that producers can’t make a decent living.
- It is the consumers – on the demand side – who are exploiting the
producers on the supply side
Government comes to the rescue by imposing a price floor. It is a minimum
bound on prices.
- Figure 6.4
- Ontario beer, certain agricultural products, minimum wage
Government legislates a “fair price” for beer which is above the equilibrium level
Creates a situation of excess quantity supplied
- Price increases, quantity supplied increases
3 /7 - Price increases, quantity demanded decreases
- Big surpluses emerge, placing downward pressure on prices
- Situation is unsustainable unless the surplus is removed from the market
Aprice floor is ineffective unless it is above the equilibrium price
Another example of asinine economics from the mouth of a politician
-
“Yes, there may be a surplus of peanuts, but better to have too much
than too little” (example)
The surplus peanuts will be bought by government to make peanut
butter, which will be offered in universities free of charge (gross peanut
butter).
Why is this statement TOTALLY WRONG?
Opportunity Cost!!! All of the exercise products of peanuts and peanuts
butter (nobody is going to eat) could have been used in another
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