GOVERNMENT POLICIES THAT ALTER THE PRIVATE MARKET OUTCOME
Price Ceiling: a legal max on the price of a good or a service
o Example: rent control
Price Floor: a legal min on the price of a good or service
o Example: minimum wage
The govt can make buyers or sellers pay a specific amount on each unit bought/sold
It is a wedge between supply and demand
Also, supply and demand cannot be equal
Example #1: The Market For Apartments
HOW PRICE CEILING AFFECT MARKET OUTCOMES
A price ceiling above the eq’m price is
not binding – has no effect on the market
Ceiling have to be below eq’m to be binding The eq’m price ($800) is above the ceiling and therefore illegal.
The ceiling is a binding constraint
on the price, causes a shortage.
$500 is the most you can charge for rent
We have an excess demand
People are willing to pay $800 but there are
no rentals available because of the shortage
In the long run, supply and demand
are more price-elastic.
So, the shortage is larger.
Rent control in capital economy causes homelessness
In the long run, supply and demand becomes elastic
Example #2: Market For Unskilled Workers
Upward sloping – want to work more
Downward sloping – want to work less
HOW PRICE FLOORS AFFECT MARKET OUTCOME A price floor below the eq’m price is
not binding – has no effect
on the market outcome.
Some students may wonder why the
$3 price floor does not cause a shortage.
After all, at a wage of $3, the quantity of unskilled
workers that firms wish to hire exceeds the quantity of unskilled workers that are looking
The eq’m wage ($4) is below the floor and therefore illegal.
The floor is a binding constraint on the wage, causes a surplus (i.e.,
Qd is less than Qs
There is a surplus of labor
THE MINIMUM WAGE
Min wage laws do not affect highly skilled workers.
They do affect teen workers.
Studies: A 10% increase in the min wage raises teen unemployment by 1-3%.
When you raise the minimum wage, there is unemployment
This effects teen workers because jobs are gone or they don’t exist
The govt levies taxes on many goods & services to raise revenue to pay for national