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ECO100 - OCT 3

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University of Toronto St. George
James Pesando

Monday - thursday 11-5 Department of economics, south of robarts st george ● Are rent controls, which keep rents below market levels, good policy? ● Are minimum wage laws, which keep wages for (unskilled) workers above market rates, good policy? ○ All developed countries. ○ Price ceilings (rent controls) and price floors (minimum wage laws) are often unhelpful, and have unintended consequences Supply, Demand and Government Policy 1. Price Ceiling ○ 1.1 General Analysis ● The impact of price ceiling ● Observations: ○ 1) Price ceiling, if beneath the market clearing price, create shortages ○ 2) Principle of voluntary exchange: can’t force people to sell more than they want to sell ■ Q(P) = minimum (Q^D (P), Q^s (P)) ■ Can’t force suppliers to force more than 16 units ○ 3) Non-price rationing ■ Quantity demanded does not equal to quantity supplied ○ 4) Those able to buy at the price ceiling could resell to other buyers at the “Black Market” price of $12. (supply up to demand curve, buy at $8 and sell at $12) 1.2 Example: Rent Controls ● Economic impact of rent controls: ○ 1) create shortages (demand exceeds supply) ○ 2) Discourage construction AND maintenance of rental housing (can always find another tenant) ○ But do rent control the disadvantage? ■ 1) To some extent, but at the above cost (significant) ■ 2) Due to shortage, landlords can “choose” tenants - would landlord prefer to rent to a doctor or a single parent with 2 children? ● Why do government impose rent control? ○ Answer: politics, there are more tenants (votes) than there are landlords. 2. Price Floor 2.1 General Analysis ● At Po: DD = SS ● At Price floor: SS > DD 2.2 Example: Minimum Wage ● ● Cannot force employers to hire employees they do not want to hire ● DD: Demand by firms for unskilled workers ● SS: supply for unskilled workers ● will cause a reduction in employment ● Economic impact of minimum wage ○ 1) Labour surplus (unemployment) - of unskilled workers ○ 2) Teenagers: most affected ○ 3) Reduce opportunity for on-the-job training ● Do minimum wage law 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 per hour. Would you expect to hire the same numb
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