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

• School: Western University
• Department: Economics
• Course: Economics 1021A/B
• Professor: Michael Parkin

Document Summary

A price ceiling or price cap is a regulation that makes it illegal to charge a price higher than a specified level. When a price ceiling is applied to a housing market it is called a rent ceiling. If the rent ceiling is set above the equilibrium rent, it has no effect. The market works as if there were no ceiling. But if the rent ceiling is set below the equilibrium rent, it has powerful effects. At the rent ceiling, the quantity of housing demanded exceeds the quantity supplied. Because the legal price cannot eliminate the shortage, other mechanisms operate: The time spent looking for someone with whom to do business is called search activity. When a price is regulated and there is a shortage, search activity increases. Search activity is costly and the opportunity cost of housing equals its rent (regulated) plus the opportunity cost of the search activity (unregulated).