Chapter 5 - What Gives When Prices Don't
Government Choices, Markets, Efficiency & Equity
What happens when markets are not allowed to adjust own their own?
When governments adjust prices, quantities adjust. Smart choices of consumers and businesses are not
coordinated. Either consumers or businesses will be frustrated.
When the price is too low, suppliers do not supply.
When the price is too high, consumers do not demand.
Rent Controls - Price Ceiling
Government can fix prices, BUT can't force businesses (or consumers) to supply (or demand) at the fixed
Rent controls fix rents BELOW market clearing price. It is a PRICE CEILING.
Rent Controls are politically popular
Most voters in big cities are renters.
Government doesn't spend money to make people happy
Rent Controls create shortage.
Condos are market controlled. Apartments are not. If there is a price ceiling.
You are the Minister of Education and your government is being pressured to eliminate university
What will be the consequence of this policy - all intended and unintended consequences?
What alternative policies might improve affordability, but cost less?
Should the government eliminate tuition? (What are the arguments for and against this policy?
It will be a stimulus to the economy (opportunity cost)
Somebody is going to pay. It is a trade-off. Tax payers will pay more but education becomes
Competition will be increased because everybody has education.
Less incentive to take school seriously (general level of participation is low)
University services may not be free.
Decrease pay for professors.
Always look for alternatives and unintended consequences of a