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Chapter 6

Economics 1021 Chapter 6 Notes

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Department
Economics
Course
Economics 1021A/B
Professor
Jeannie Gillmore
Semester
Fall

Description
Chapter 6 Housing Market with a Rent Ceiling  Price ceiling (Price Cap): A government regulation that makes it illegal to charge a price higher than a specified level o A price cap set above the equilibrium price has no effect, as it does not constrain the market force. o A price cap set below the equilibrium has powerful effect on the market, as it attempts to prevent the price from regulating the quantities demanded and supplied (going against the market force)  Rent ceiling: Price cap specific to a housing market. A rent ceiling set below equilibrium rent creates: o Housing Shortage:  At equilibrium, quantity supplied equals quantity demanded. When rent cap is below equilibrium, quantity demanded exceeds quantity supplied and there is a shortage.  Since homes are necessities, smaller quantity must be allocated among frustrated demanders. o Increased Search Activity: Increased time spent looking for someone with whom to do business  Would-be-renters search the newspaper, internet, and brokers for possible supplier breakout  It uses valuable resources (including money and time) that could have been valuable otherwise  Increased search activity can by itself raise the cost of housing (not rent) o Black Market: An illegal market in which the equilibrium price exceeds the price ceiling.  The level of black market rises with the harshness of the rent ceiling enforcement  With loose enforcement, black market rent is similar to unregulated rent.  With harsh enforcement, black market rent equals the maximum price that a renter is willing to pay o Inefficiency:  Rent ceiling below the equilibrium an inefficient underproduction of housing services.  MSB exceeds its MSC, and a deadweight loss shrinks the producer surplus and consumer surplus.  Potential loss from increased search activity is also borne by consumers. o Unfairness:  Fair rules view: Rent ceiling is unfair because it blocks voluntary exchange.  Fair results view: Rent ceiling could be fair, but often not due to these methods:  Lottery: Not fair, since it allocates housing to those who are lucky  First-come, serve: Not fair, since it allocates housing to people with the greatest foresight  Discrimination: Not fair, since it allocates housing based on friendship, family, race, etc. Labour Market with a Minimum Wage  Price floor: A government regulation that makes it illegal to charge a price lower than a specified level o A price floor set below the equilibrium price has no effect, since it does not constrain the market forces. o A price floor set above the equilibrium has powerful effects, since it attempts to prevent the price from regulating the quantities demanded and supplied (going against the market force).  Minimum wage: Price floor specific to a labour market. A minimum wage set above the equilibrium wage creates: o Unemployment:  At equilibrium, quantity supplied equals quantity demanded. When the minimum wage is above the equilibrium, quantity supplied exceeds quantity supplied, and there is a surplus of labour.  Since the demand for labour determines the level of employment, the surplus is unemployed. o Inefficiency:  Supply = Marginal social cost of labour; leisure forgone  Demand = Marginal social benefit; value of the goods and services produced  MSB of labour exceeds its MSC, and a deadweight loss shrinks the firms’ and workers’ surplus.  Potential loss from increased job search is also borne by the workers. o Unfairness:  Fair rules view: Minimum wage is unfair because it blocks voluntary exchange.  Fair results view: Minimum wage is unfair because only those who are already employed benefit from it, and those who are unemployed are worse off. Taxes  Tax incidence: Division of the burden of a tax between buyers and sellers o When the government imposes tax on a good, the price paid by buyers might rise by the  Full amount of the tax (buyer pay the tax entirely)  Portion of the tax (buyer and seller pay the tax)  Not at all (seller pay the tax entirely)  Tax on sellers: o Add the tax to the minimum price that sellers are willing to accept for each quantity sold. o A tax on sellers lower the amount they are willing to sell, so the supply curve shifts leftward.  Tax on buyers: o Subtract the tax from the maximum price that buyers are willing to pay for each quantity bought. o A tax on buyers lower the amount they are willing to pay the seller, so the demand curve shifts leftward.  Equivalence: o Tax on buyers and sellers both decrease the equilibrium quantity the same. o Buyers respond to price that includes the tax, and sellers respond to price that excludes
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