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Midterm

Economics 1021A/B Study Guide - Midterm Guide: Tax Incidence, Economic Surplus, Uranian


Department
Economics
Course Code
ECON 1021A/B
Professor
Bruce Hammond
Study Guide
Midterm

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Economics Midterm #2 Review
Chapter 6- Market Interference
- 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 effect

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Housing Shortage
- Effects of rent ceiling set below the equilibrium price
- Ex. The equilibrium rent is $1,000 a month, A rent ceiling is set at $800 a month, So the equilibrium rent
is in the illegal region.
- At the rent ceiling, the quantity of housing demanded exceeds the quantity supplied.
There is a shortage of housing.
Black Market
- A black market is an 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.
- A rent ceiling decreases the quantity of housing supplied to less than the efficient quantity.
- A deadweight loss arises. Producer surplus shrinks. Consumer surplus shrinks.
- There is a potential loss from increased search activity.
- A rent ceiling set below the equilibrium rent leads to an inefficient underproduction of housing services.
- The marginal social benefit from housing services exceeds its marginal social cost and a deadweight loss
arises.

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- A price floor is a regulation that makes it illegal to trade at a price lower than a specified level.
- When a price floor is applied to labour markets, it is called a minimum wage.
- If the minimum wage is set below the equilibrium wage rate, it has no effect. The market works as if
there were no minimum wage.
- If the minimum wage is set above the equilibrium wage rate, it has powerful effects.
- The quantity of labour employed is the quantity demanded.
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