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Economics 1021A/B Lecture Notes - Avoidance Speech, Deadweight Loss, Price Floor

Course Code
ECON 1021A/B
Jeannie Gillmore

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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
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
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