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Chapter 6 Notes.docx

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Western University
Economics 1021A/B
Jeannie Gillmore

Chapter 6 Notes Housing Markets and Rent Ceilings  a government regulation that makes it illegal to charge a price higher than a specified level is called a price ceiling or price cap o a price ceiling set above the equilibrium price has no effect o a price ceiling set below the equilibrium price has a powerful effect on the market  price ceilings attempt to prevent the price from regulating the quantities demanded and supplied  market forces and the law conflict  when a price ceiling is applied to a housing market, it is called a rent ceiling o creates a housing shortage, increased search activity, a black market  housing shortage o when rent is set below the equilibrium rent, the quantity of housing demanded exceeds the quantity supplied (a shortage)  created when rent ceiling is set below equilibrium rent o when there is a shortage, the quantity of houses must be allocated among the demanders, often through increased search activity  increased search activity o time spent looking for someone with whom to do business is referred to as search activity o when a price is regulated and there is a shortage, search activity increases o the opportunity cost of a good is equal not only to its price but also to the value of the search time spent finding the good  opportunity cost of housing is equal to the rent plus the time and other resources spent searching for it o the cost of increased search activity might end up (when added to capped rent) being higher than the price of rent if there was no rent ceiling  black market o a rent ceiling encourages illegal trading in a black market, an illegal market in which the equilibrium price exceeds the price ceiling  occur in rent-controlled housing and many other markets o may be created through making new tenants pay high amounts for worthless items (e/x new drapes, new locks/keys, etc.) o black market rent depends on how tightly the rent ceiling is enforced  loose enforcement, black market rent is close to the unregulated rent  strict enforcement, black market rent is equal to the maximum price that a renter is willing to back  inefficiency of a rent ceiling o a rent ceiling set below equilibrium rent results in an inefficient underproduction of housing o the marginal social benefit of housing exceeds its marginal social cost and a deadweight loss shrinks the producer surplus and consumer surplus  are rent ceilings fair? o according to the fair rules view, anything that blocks voluntary exchange is unfair, so rent ceilings are unfair o however, according to the fair result view, a fair outcome is one that benefits the less well off o thusly, the fairest outcome is the one that allocates scarce housing to the poorest  blocking rent adjustments does not eliminate scarcity, as it decreases the quantity available in the housing market  the market must allocate a smaller quantity of housing o mechanisms of allocation:  lottery  allocates to those who are lucky, not the poorest  first-come, first-served  allocates to those who have the greatest foresight, no the poorest  discrimination  allocations based on the views and self-interest of the owner of the housing  owner’s are the bureaucrats who put in the rent ceiling in the first place o in principle and in practice, rent ceilings are unfair Labour Markets and Minimum Wage  a government regulation that makes it illegal to charge a price lower than a specified level is called a price floor o price floors set below equilibrium price have no effect o price floor set above the equilibrium price has powerful effects  attempts to prevent the price form regulating the quantities demanded and supplied  force of the law and market conflict o a price floor in the labour market is called minimum wage  minimum wage brings unemployment o at a wage rate above equilibrium, the quantity of labour supplied exceeds the quantity of labour demanded (surplus of labour) o demand for labour determines the level of employment, and the surplus of labour is unemployed  inefficiency of minimum wage o in the labour market, the supply curve measures the marginal social cost of labour to workers  this cost is leisure forgone o demand curve measures the marginal social benefit from labour  benefit is the value of goods and services produced o an unregulated labour market allocates the economy’s scare labour resources to the jobs in which they are valued most highly  market is efficient o the minimum wage frustrates the market mechanism and results in unemployment from increased job search  at the quantity of labour employed, the marginal social benefit exceeds its marginal social cost, and a deadweight loss shrinks the firm’s and worker’s surplus  is minimum wage fair? o no, it delivers an unfair result and imposes an unfair rule  the result is unfair because only those who have jobs and keep them benefit from minimum wage  the unemployed are worse off than they would be with no minimum wage  the rules aren’t fair as it blocks voluntary exchange  firms are willing to hire more labour and people are willing to work more, but they are not permitted to do so under the law Taxes  tax incidence o tax incidence is the division of the burden of a tax between buyers and sellers o when the government imposes a tax on the sale of a good, the price paid by buyers might rise by the full amount of the tax, by a lesser amount, or not at all  if the price paid rises by the full amount, then the burden of the tax falls entirely on the buyer  if the price paid by buyers rises by a lesser amount than the tax, the burden is split between the buyer and the seller  if the price paid does not change, the burden of the tax fails entirely on the seller o tax incidence does not depend on the tax law
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