Lecture 8-Supply, Demand and Government Policy

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1 Aug 2010
School
Department
Course
Professor
Thursday, October 8, 2009.
Supply, Demand, and Government Policy
Theme
Government intervention in competitive markets is not helpful.
The Impact of Price Ceiling
Observations
1. Price ceiling, if beneath the market clearing price, creates shortages.
2. Principle of voluntary exchange:
Q (P) = minimum [QD(P), QS(P)]
3. Non-price rationing
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SS
Q
P
DD
12
16
Price Ceiling
Shortage
8
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Rent Ceiling
Economic Concerns with Rent Controls
1) Shortage
2) Incentive Effects
- discourages construction (shortage worsens in long run)
- discourages maintenance
3) Non-price rationing
- inefficient (search time, opportunity cost)
- ODQGORUGV³FKRRVH´WHQDQWV
4) Not targeted to poor (single parent or doctor as preferred tenant?)
Price Floor
SS
Q
P
DD
QS
Shortage
QD
Rent Ceiling
SS
Q
P
DD
QD
Surplus
QS
Price Floor
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2. Application: Minimum Wage
(1) Labour surplus (unemployment)
(2) Teenagers: Most affected
(3) Reduces opportunity for on-the-job training
Minimum Wage: Three Possibilities
(1) At less than $6
Minimum Wage = $5.00 No Impact
(2) At $6
Minimum Wage = $6.00 No Impact
(3) At more than $6
Minimum Wage = $6.00 Employment Falls, Unemployment Rises
Earned Income Tax Credit as Alternative to Increase in the Minimum Wage
1. Minimum Wage $6.00
2. Earned Tax Credit* $1.00
_____
$7.00 Effective Wage
*targeted (say) single-parents or adults
SS
Q
DD
200
$6
$7
$5
Minimum = $7
Minimum = $5
Wage Rate
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