Economics Day 4.docx

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Wilfrid Laurier University
Olivia Ozlem Mesta

Economics Day 4 Chapter 6 Lecture: Wednesday, October 3 Government Policies That Alter the Private Market Outcome  Price controls o Price ceiling- a legal maximum on the price of a good or service (rent control)  A price ceiling above the equilibrium price will have no effect on market equilibrium  A ceiling set below equilibrium will result in a (quantity demanded is greater than quantity supplied)  In the long run because both supply and demand are more elastic so the shortage gets larger o Price floor- a legal minimum on the price of a good or service (minimum wage)  a price floor below the equilibrium price it will have no effect on the market equilibrium  a price floor set above the equilibrium will result in a surplus of unemployed workers (unemployment)  Taxes o The government can make buyers or sellers pay a specific amount on each unit bought/sold Shortages and Rationing  With a shortage sellers must ration the goods among buyers  Some rationing mechanisms o Long lines o Discrimination according to seller biases  these mechanisms are often unfair and inefficient the goods don’t necessarily go to the buyers who value them most highly  In contrast when prices are not controlled the rationing mechanism is efficient (goes to buyers who value them the most and is fair) Are Rent Ceilings Fair?  A rent ceiling does not generally benefit the poor  A rent ceiling decreases the quantity of housing and scarce housing is allocated by o Lottery o First come, first serve o Discrimination Evaluating Price Controls  Recall one of ten principles: markets are usually a good way to organize economic activity  Prices are the signals that guide allocation of society’s resources this allocation is altered when policymakers restrict prices  Price controls are often intended to help the poor but they often hurt more than help o Minimum wage can cause job losses o Rent control can reduce the quantity and quality of living Evaluating Minimum Wages  Arguments against minimum wage  Minimum wages are probably the most contentious example o People argue that a worker cannot make a living wage on a low minimum wage- that is certainly true but the issue is who makes the minimum wage- if it is primarily students then we do not expect them to be supporting a family o There is also little evidence that raising the minimum wage has reduced us to poverty o One of the arguments against minimum wage is that only those people who have jobs and keep them benefit from the minimum wage. o The unemployed end up wo
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