Chapter 6 Government Actions in Market
Price ceiling or Price cap - a government regulation that make it illegal to charge price higher
than a specified level
A price ceiling above the equilibrium has no effect but a price ceiling below equilibrium creates
a shortage, increases search activity and a creates a black market.
Search activity - the time spent looking for someone with whom to do business/transaction
So in a price ceiling below equilibrium, opportunity cost is bothe the price plus the search cost.
Black market - illegal market when the equilibrium price exceeds the price ceiling.
The level of black market prices depends on how tightly the rent ceiling is enforced, with loose
enforcement, the black market rent is close to unregulated rent.
When the rent ceiling is set below the equilibrium rent results in an efficient underproduction of
housing services. The marginal social benefit of housing exceeds its marginal cost and a
deadweight loss shrinks the producer surplus and consumer surplus. The full cost of the rent
ceiling is the sum of the deadweight loss and the increased cost of search.
According to fair-rules view, anything that blocks voluntary exchange is unfair → rent is unfair
Fair results, a fair outcome is one that benefits the less well off
This might lead to discrimination, because housing would be based on self interest of the owner
of the house.
Price floor - government regulations makes it illegal to charge a price lower than a specified
Price floor below equilibrium has no effect while a price floor above the equilibrium reduces the
When a labour market has no minimum wage, scarce jobs are allocated by the market
price, which is the equilibrium wage rate in the market. But with a minimum wage, a
surplus of labour arises. Scarce jobs are allocated in many ways, such as personal
characteristics, first-come first-served, or discrimination.