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Chapter 6

ECON101 Chapter Notes - Chapter 6: Price Ceiling, Economic Equilibrium, Social Cost

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Corey Van De Waal

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Chapter 6. Government Actions in Markets
A Housing Market with a Rent Ceiling
A government regulation that makes it illegal to charge a price higher
than a specified level: price ceiling or price cap
A price ceiling set ABOVE THE EQUILIBRIUM PRICE NO effect
(b/c the force of the law and the market forces are not in conflict)
A price ceiling set BELOW THE EQUILIBRIUM PRICE Powerful effects
(b/c the price ceiling attempts to prevent the price from regulating the
quantities demanded and supplied so, the force of the law and the
market forces re in conflict)
When a price ceiling is applied to a housing market: rent ceiling
A rent ceiling set below the equilibrium rent causes:
- A housing shortage
- Increases search activity
- A black market
A housing shortage
- In a housing market, when the rent is at the equilibrium level, the
quantity of housing supplied equals the quantity of housing
demanded no shortage, no surplus of housing
- But at a rent set below the equilibrium rent, the quantity of
housing demanded exceeds the quantity of housing supplied
- When there is a shortage, the quantity available is the quantity
supplied, and somehow this quantity must be allocated among
the frustrated demanders
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