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Economics 1021A/B
Jeannie Gillmore

Econ 1021 – Chap 6 Government Actions in Markets A Housing Market with a Rent Ceiling  Price ceiling/price cap  gov regulation that makes it illegal to charge price higher than specified level  Price ceiling above equilibrium  no effect  Does not constrain market forces  Price ceiling below equilibrium  powerful effect  Price ceiling attempts to prevent price from regulating quan demanded and supplied  Rent ceiling  price ceiling applied to housing market  Below equilibrium creates 1. Housing shortage  In housing market, rent at equilibrium  quan of housing supplied = quan of housing demanded  Rent below equilibrium  shortage  more demanded 2. Increase Search Activity  Search for someone to do business with  Opportunity cost  not only price, but value of search time  Opp cost = rent + time/other resources spent searching 3. A Black Market  Rent ceiling encourages black market  illegal market in which equilibrium price excels price ceiling  Level of black market rent depends how tightly rent ceiling is enforced  Strict enforcement  rent = max price renter is willing to pay Inefficiency of a Rent Ceiling  Rent ceiling below equilibrium rent = inefficient underproduction  Marginal social benefit exceeds marginal social cost  Deadweight loss shrinks producer surplus and consumer surplus Are Rent Ceilings Fair?  Fair rules view  anything that blocks voluntary exchange is unfair  rent ceilings are unfair  Fair result view  fair outcome  benefits less well off  fair to allocate scare housing to poorest i. Lottery  allocates to those who are lucky not to poor ii. First come first serve  allocates to those who have greatest foresight and get names on list first  not to poorest iii. Discrimination  allocates scare housing based on views of self interest of A Labour Market with a Min Wage  Price floor  gov regulation that makes it illegal to charge price lower than specified level  Price floor below equilibrium  no effect  Price floor above equilibrium  powerful effect  Attempts to prevent price from regulating the quan demanded and supplied  Min wage  imposed at a level above equilibrium wage creates unemployment 1. Min wage brings unemployment  Wage rate above equilibrium wage  quan of labour supplied exceeds demanded  surplus of labour  Demand for labour determines level of employment  surplus = unemployment 2. Inefficiency of Min Wage  In labour market  supply curve  marginal social cost of labour to workers  Demand curve  marginal social benefit from labour  Min wage  results in unemployment and increased job search  Quan of labour employed  marginal social benefit exceeds marginal social cost  dead weight loss shrinks the firm and workers surplus 3. Is min wage fair  Min wage unfair in both views of fairness  Unfair result  only people who have jobs and keep them benefit from min wage  and unfair rule  blocks voluntary exchange Taxes Tax Incidence  division of burden of tax between buyers and seller  price paid by buyers rises by full amount  tax on buyer  price paid by buyer rises lesser amount than tax  on both buyer/seller  price paid by buyer doesn’t change at all  tax on seller Tax on Sellers  tax on seller increase in cost  decrease supply  supply curve shifts leftward Tax on Buyers  lowers amount willing to pay sellers  decrease demand  shifts demand curve leftward Equivalence of Tax on Buyers and Sellers 
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