Chapter 5: What Gives When Prices Don’t? (Government Choices,
Markets Efficacy, and Equity)
-When price is fixed below market-clearing, shortages develop (quantity demanded
greater than quantity supplied) and consumers are frustrated. Quantity sold =
quantity supplied only.
-When price is fixed above market-clearing, surpluses develop (quantity supplied
greater than quantity demanded) and businesses are frustrated. Quantity sold =
quantity demanded only
Fixed Prices = No coordinated Prices- The only way shortages or surpluses
disappear is by quantities adjusting to whichever is less. With fixed prices, either the
consumer or business is frustrated.
Rent Controls: Example of price ceiling, maximum price set by government,
making it illegal to charge higher price.
“Robin Hood Principal”: To take from the rich, and give to the poor.
-Housing shortages, an unintended consequence of rent controls, give landlords the
upper hand in dealings with tenants.
-A contributing factor to the shortage of housing may be that landlord’s benefits no
longer exceed opportunity costs.
-Remaining tenants may not see the incentive of keeping the rented space in good
condition, and may start collecting “key money”.
-Unintended consequence of rent controls is subsidizing well-off tenants willing and
able to pay market-clearing rent.
-Alternative policies to help the homeless are government subsides, to help the poor
pay rent, and government-supplied housing. But all polices have opportunity costs to
-Living Wage: 10$ per hour, enough to allow an individual in a Canadian City to live
above the poverty line.
-Minimum Wage Laws: example of a price floor, minimum price set by
government, making it illegal to pay lover price. -When governments set minimum wages above market-clearing wage, quantity of
labor supplied by households, will be greater than quantity of labor demanded
businesses, creating unemployment.
-Quantity of unemployment creating is increased minimum wage depends on the
businesses elasticity of business demand for unskille