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L8 - Supply, Demand and Government Policy - 10022013.pdf

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University of Toronto St. George
James Pesando

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? Answer: 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 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 Rent Ceiling 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? Price Floor At P0: DD = SS At Price Floor: SS > DD Example: 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? Thought experiment: 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? Student Exercise: 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. No Tax Price paid by buyers = Price received by sellers = Market Price Tax levied (collected by) on seller Price paid by buyer = Market Price Price received by seller = Market price - Tax Case #1: Sales Tax Levied on Sellers No Tax Sellers Pay $ 10 Tax
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