ECON 1 Lecture Notes - Lecture 5: Luxury Tax
#5 Tuesday 1/30 (Ch.6 Price Controls)
Outline
● Today: Chapter 6
○ Price Controls
■ Rent control
■ Minimum wage
○ Taxes
● Next lecture: Efficiency of markets (Ch.7)
The Efficiency of Markets
● Markets are usually a good way to organize economic activity
○ Prices are signals that guide the allocation of society’s resources.
○ Goods go to consumers that value them the most
● When government policies restrict prices → unintended consequences
○ This does not mean the government should never step in
Rent Control
Rent Control is Inefficient
● With a shortage, owners ration apartments among renters
○ Some renters, end up without an apartment (key point)
○ Long “lines”
○ Quality is lower
○ Discrimination according to sellers’ biases (not necessarily the case, but possible)
Question
In the long run, the shortage from rent control
A. Becomes smaller
B. Becomes larger
C. Stays the same
D. We cannot tell
Hint: think about elasticity
Long Run
In the long run, D and S are more elastic → the shortage
is larger
EXAMPLE 2: Minimum Wage
The Minimum Wage
Document Summary
Markets are usually a good way to organize economic activity. Prices are signals that guide the allocation of society"s resources. Goods go to consumers that value them the most. When government policies restrict prices unintended consequences. This does not mean the government should never step in. With a shortage, owners ration apartments among renters. Some renters, end up without an apartment (key point) Discrimination according to sellers" biases (not necessarily the case, but possible) In the long run, the shortage from rent control: becomes smaller, becomes larger, stays the same, we cannot tell. In the long run, d and s are more elastic the shortage is larger. In this example, the minimum wage hurts the workers that it is designed to help : low wage workers. Unemployment depends on elasticity of d and s. the actual magnitude of this effect is debated. Buyers pay p b = . 00 (difference = . 50 = tax)