Economics 1021A Chapter 6 20131019
A price ceiling or price cap is a regulation that makes it illegal to charge a price higher than a
When a price ceiling is applied to a housing market it is called a rent ceiling.
If the rent ceiling is above the equilibrium rent, it has no effect. The market works as if there were no
But if the rent ceiling is below the equilibrium rent, it has powerful effects.
At the rent ceiling, the quantity of housing demanded exceeds the quantity supplied. There is a shortage of
Because the legal price cannot eliminate the shortage, other mechanisms operate:
Increased search activity
The time spent looking for someone with whom to do business is called search activity.
When a price is regulated and there is a shortage, search activity increases.
Search activity is costly and the opportunity cost of housing equals its rent (a regulated price) plus the
opportunity cost of the search activity.
A black market
A black market is an illegal market that operates alongside a legal market in which a price ceiling or
other restriction has been imposed.
A shortage of housing creates a black market in housing.
Illegal arrangements are made between renters and landlords at rents above the rent ceiling—and
generally above what the rent would have been in an unregulated market.
A rent ceiling set below the equilibrium rent leads to an inefficient underproduction of housing services.
The marginal social benefit from housing services exceeds its marginal social cost and a deadweight loss
A rent ceiling decreases the quantity of housing supplied to less than the efficient quantity. A deadweight
loss arises, producer surplus shrinks, consumer surplus shrinks.
There is a potential loss from increased search activity.
According to the fair rules view, a rent ceiling is unfair because it does not allow for equality of opportunity
According to the fair results view, a rent ceiling is unfair because it does not generally benefit the poor.
A rent ceiling decreases the quantity of housing and the scarce housing is allocated by:
Lottery A lottery gives scarce housing to the lucky.
A firstcome, first served gives scarce housing to those who have the greatest foresight and get their
names on the list first.
Discrimination gives scarce housing to friends, family members, or those of the selected race or sex.
None of these methods necessarily allocates scarce housing to the less well off, so they are not necessarily
A price floor is a regulation that makes it illegal to trade at a price lower than a specified level.
When a price floor is applied to labour markets, it is called a minimum wage.
If the minimum wage is set below the equilibrium wage rate, it has no effect. The market works as if there
were no minimum wage.
If the minimum wage is set above the equilibrium wage rate, it has powerful effects.
If the minimum wage is set above the equilibrium wage rate, the quantity of labour supplied by workers
exceeds the quantity demanded by employers. There is a surplus of labour.
The quantity of labour hired at the minimum wage is less than the quantity that would be hired in an
unregulated labour market.
Because the legal wage rate cannot eliminate the surplus, the minimum wage creates unemployment.
A minimum wage leads to an inefficient outcome. The quantity of labour employed is less than the efficient
The supply of labour measures the marginal social cost of labour to workers (leisure forgone).
The demand for labour measures the marginal social benefit from l