Economics 1021A/B Chapter Notes -Price Ceiling, Deadweight Loss, Economic Equilibrium

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24 Apr 2012
Department
Nicole Wallenburg
Mr. Parkin
Economics
Oct 16, 2011
Economics Textbook Notes
A Housing Market With A Rent Ceiling
A government regulation that makes it illegal to charge a price higher than a specified
level is called a price ceiling or price cap.
A price ceiling set above the equilibrium price has no effect
A price ceiling set below the equilibrium, price has powerful effects on a market
When a price ceiling is applied to a housing market it is called a rent ceiling. A rent
ceiling is set below the equilibrium rent creates
A housing shortage
Increased search activity
A black market
Housing Shortage
At a rent set below equilibrium rent, the quantity of housing demanded exceeds the
quantity of housing supplied there is a shortage
When there is a shortage, the quantity available is the quantity supplied and,
somehow, this quantity must be allocated among the frustrated demanders
Increased Search Activity
The time spent looking for someone with whom to do business is called search activity.
IN some markets, such as the housing market, people spend a lot of time checking the
alternatives available before making a choice.
When a price is regulated and there is a shortage, search activity increases.
The opportunity cost of a good is equal not only to its price but also to the value
of the search time spent finding the good
A Black Market
A rent ceiling also encourages illegal trading in a black market, an illegal market in
which the equilibrium price exceeds the price ceiling.
The level of a black market rent depends on how tightly the rent ceiling I enforced.
With loose enforcement, the black market rent is close to the unregulated rent
With strict enforcement the black market rent is equal to the maximum price that
a renter is willing to pay
Inefficiency of a Rent Ceiling
A rent ceiling set below the equilibrium rent results in an efficient underproduction of
housing services The marginal social benefit from housing exceeds its marginal social
cost and a deadweight loss shrinks the producer surplus and consumer surplus.
Because the quantity of housing supplied is less than the efficient quantity, a
deadweight loss arises
Producer surplus shrinks
Consumer surplus shrinks
There is a potential loss from increased search activity
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