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Lecture 6

Lecture 6 on Government Intervention Notes

11 Pages
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Department
Economics
Course Code
ECON 1000
Professor
Steven Edwards

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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 ceiling. • 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 effects. • 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 the QS. - This causes a shortage within the housing market - Because legal price cannot eliminate the shortage, other mechanisms operate: 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 search activity - When price is regulated, plus the opportunity cost of the search activity. - Because quantity of housing is less than the quantity in an unregulated market, the opportunity cost of housing exceeds the unregulated rent. Black Market - 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 1) Lottery 2) First come-First-served 3) Discrimination 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 minimum wage - 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 powerful effects. -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 EXAMPLE - 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 labor • 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 TAXES - 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
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