ECONOMICS LECTURE SIX: GOVERNMENT INTERVENTIONS IN
THE MARKET NOTES
• Can governments cap rents to help renters?
• Can governments make housing more affordable by raising
incomes with minimum wage laws?
• Price Ceiling/Price Cap: Regulation that makes it illegal to charge
a price higher than a specified level.
• When price ceiling is applied to housing market it is called a rent
• If rent ceiling is set above equilibrium rent it has no effect. The
market works as if there were no ceiling
• If rent ceiling is set below the equilibrium rent it has powerful
• i.e. Effects of a rent ceiling that is set under the equilibrium rent
- Rent is $1,000 per month
- A rent ceiling is set at $800 per month, so equilibrium rent is in
the illegal region.
- At the rent ceiling the quantity of housing demanded exceeds
- This causes a shortage within the housing market
- Because legal price cannot eliminate the shortage, other
1) Increased search activity
2) A Black Market
* With the shortage, someone is willing to pay up to $1,200 for
the scarce resource now.
- Time spent looking for someone with whom to do business is
- When price is regulated, plus the opportunity cost of the search
- Because quantity of housing is less than the quantity in an
unregulated market, the opportunity cost of housing exceeds the
- Illegal market that operates alongside a legal market in which a
price ceiling or other restriction has been imposed
- A shortage of housing creates a black market in housing.
- Illegal arrangements are made between renters and landlords
at rents above the rent ceiling and generally above what the rent
would have been in an unregulated market.
- A rent ceiling set below the equilibrium rent leads to inefficient ECONOMICS LECTURE SIX: GOVERNMENT INTERVENTIONS IN
THE MARKET NOTES
underproduction of housing services
- Marginal social benefit from housing services exceeds its
marginal social cost and a deadweight loss arises.
- A rent ceiling decreases the quantity of housing supplied to less
than the efficient quantity. (Deadweight loss arises, producer
surplus shrinks, consumer surplus shrinks)
Are Rent Ceilings Fair?
- According to the fair rules view, a rent ceiling is unfair because
it blocks voluntary exchange.
- According to the fair results view, a rent ceiling is unfair
because it does not generally benefit the poor
- Rent ceiling decreases the quantity of housing and the scarce
housing is allocated by
2) First come-First-served
Price Floor: Regulation that makes it illegal to trade at a price
lower than a specified level
- When a price floor is implemented to labor markets it is called a
- If minimum wage is set below the equilibrium wage, it has no
effect, the market works as if there were no minimum wage.
- If minimum wage is set above the equilibrium wage rate, it has
-If minimum wage is set above the equilibrium wage rate, the
quantity of labor supplied by workers exceeds the quantity
demanded by employers.
- There will be a surplus of labor. The quantit of labour hired at
the minimum wage is less than the quantity that would be hired
in an unregulated labor market.
- Because the legal wage rate cannot eliminate the surplus, the
minimum wage creates unemployment
- Equilibrium wage rate is $9 an hour
- The minimum wage rate (price floor) is set at $10 an hour
- Equilibrium wage rate is in the illegal region
- Quantity of labor employed is the quantity demanded.
- Quantity of labor supplied exceeds the QD and the
unemployment is created
- With only 20 million hours demanded, some workers are willing
to supply the last hour demanded for $8.
- Leads to an inefficient outcome, the quantity of labor measures ECONOMICS LECTURE SIX: GOVERNMENT INTERVENTIONS IN
THE MARKET NOTES
the marginal social cost of labor to workers (leisure forgone)
- Demand for labor measures the marginal social benefit from
• Miminum wage set abive the equilibrium wage decreases the
quantity of labor employed.
• Deadweight loss arises
• Potential loss from increased job search decreases both workers
surplus and firms surplus.
• Full loss is the sum of the red and grey areas.
• Minimum wage rate in Canada is set by provincial governments
• In 2011, minimum wage rate ranged from a low of $8.75 an hour
in B.C to a high of $11.00 an hour in Nunavut
• Most economists believe that minimum wage laws increase
unemployment rate of low skilled younger workers
- Everything you earn and most things you buy are taxed.
- Income taxes and social security are deducted from your pay
and HST (or GST) is added to the price of things you buy, so we ECONOMICS LECTURE SIX: GOVERNMENT INTERVENTIONS IN
THE MARKET NOTES
as consumers and workers pay these taxes.
- Tax incidence is the division of the burden of a tax between
buyers and sellers, when an item is taxed its price might rise by
the full amount of the tax by a lesser amount or not at all. If price
rises by the full amount of the