ECON 1050 Chapter 6: Chapter 6 - Government Actions in Markets
Document Summary
A price ceiling or price cap is a regulation that makes it illegal to change a price higher than specified level. When a price ceiling is applied to a housing market it is called a rent ceiling. If the rent is set above the equilibrium rent, it has no effect. The markets works as if there were no ceiling. In the figure alongside, shows the effects of a rent ceiling that is set below the equilibrium rent. But a rent ceiling set below the equilibrium rent creates: a housing shortage. The equilibrium rent is ,000 a month. A rent ceiling is set at a month. So the equilibrium rent is in the illegal region. At the rent ceiling, the quantity of housing demanded exceeds the quantity supplied. Because the legal price cannot eliminate the shortage, other mechanisms operate: With the shortage, someone is willing to pay up to ,200 a month.