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,
○ 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
○ 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
■ 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
○ 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