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Economics 1021A/B
Michael Parkin

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 Nicole Wallenburg Mr. Parkin Economics Oct 16, 2011  The full loss from the rent ceiling is the sum of the deadweigh
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