ECO105Y1 Lecture Notes - Lecture 7: Price Ceiling, Unintended Consequences, Opportunity Cost

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30 Apr 2016
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Prices are the signals that coordinate the smart decisions of consumers and businesses. Businesses are willing to supply only if price covers all opportunity costs of production. Consumers are willing to demand only if their smart choices make them willing and able to pay for the product/service at that price. Governments can legally fix prices, but consumers and businesses will adjust quantities to make their respective smart choices at the fixed price. In a voluntary market system, neither businesses nor governments can force consumers to buy more at the higher price. Rent controls are a form of price fixing. Governments can set a maximum rent price ceiling; it limits how rents can be raised, while allowing rents to be flexible downward. Rent controls as a way of redistributing income from (relatively) rich landlords to (relatively) poor tenants. Rent ceilings are always set below the market-clearing rent, creating a classic shortage.

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