Are rent controls, which keep rents BELOW market levels, good policy?
Are minimum wages laws, which keep wages for (unskilled) workers ABOVE market rates, good policy?
The Impact of Price Ceiling
1. Price ceiling, if beneath the market clearing price, creates shortages.
2. Principle of voluntary exchange:
Q ( P ) = minimum Q D ( P )Q S( P )]
3. Non-price rationing
4. Those able to buy at the price ceiling could resell to other buyers at the "Black Market" price of $12
Economic impact of rent controls:
1. Create shortages (demand exceeds supply)
2. Discourage construction AND maintenance of rental housing
But do rent controls help the disadvantaged?
1. To some extend, but at the above cost. 2. Due to shortage, landlords can "choose" tenants - would landlord prefer to rent to a doctor or a single parent with 2 children?
At P0: DD = SS
At Price Floor: SS > DD
DD: Demand by firms for unskilled workers
SS: Supply of unskilled workers
1. Labour surplus (unemployment)
2. Teenagers: Most affected
3. Reduces opportunity of on-the-job training
Do minimum wage laws REALLY reduce jobs for unskilled workers?
Suppose you are an employer and the minimum wage rate increases from $10.25 per hour to $50.00 per hour. Would you expect to
hire the same number of unskilled workers?
Under what condition would raising the minimum wage rate NOT reduce employment? Answer: If DD for unskilled workers is perfectly inelastic - which is not realistic
The government imposes a sales tax of 10%
Will the price paid by consumers:
1. increase by exactly 10%
2. increase, but by less than 10%
3. not increase
Answer: depends on the (price) elasticities of demand and supply
The Incidence of a Sales Tax
Refers to ultimate burden of tax
Measures by higher price paid by buyers and lower price received by sellers.
Price paid by buyers
Price received by sellers
Tax levied (collected by) on seller
Price paid by buyer
Price received by seller
Market price - Tax
Case #1: Sales Tax Levied on Sellers
No Tax Sellers Pay $ 10 Tax