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Chapter 6

Chapter 6 - ECON 1000


Department
Economics
Course Code
ECON 1000
Professor
Sam Lanfranco
Chapter
6

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A Housing Market with a Rent Ceiling
When rents are high renters lobby the government for limits on rents
Government regulation that makes it illegal to charge a price higher than specified level is a price ceiling or a price cap
Most of our income is spent on housing
Effects of a price ceiling on a market depend crucially on whether the ceiling is imposed at a level that is above or below equilibrium price
If above then there is no effect because it does not constrain market forces
Prevents the price from regulating quantities demanded and supplied, force of law and market are in conflict
If below then there are powerful effects
A housing shortage
In housing, quantity of housing supplied equals quantity of housing demanded
With a rent set below equilibrium, demand exceeds supply and there is a shortage of housing
Results in increased search activity
With a shortage the quantity available is quantity supplied and must be allocated among frustrated demanders
At equilibrium quantity demanded is equal to quantity supplied
Increased search activity
Frustrated would-be renters scan papers for housing ads and death notices
Time spent looking for someone to do business is search activity
Opportunity cost of housing is equal to rent and time and other resources spent searching for the restricted quantity
Uses time and other resources like phone calls, automobiles, and gasoline that
Opportunity cost is equal to its price and value of search time spent finding good
Rent ceiling may make full cost of housing higher than without rent ceiling
Black market
Illegal market in which equilibrium price exceeds price ceiling
Example: scalpers sell tickets for big events
Charge high prices for cheap drapes or "key money" (exorbitant price for new locks)
With price ceilings renters find more ways to make money
When loose, black market rent is similar to unregulated rent
When strict, black market rent is equal to the maximum price a renter is willing to pay
Level of black market related to how tightly rent ceiling is enforced
Inefficiency of a Rent Ceiling
Marginal social benefits exceed marginal social cost and deadweight loss shrinks producer and consumer surplus
A rent ceiling set below equilibrium results in inefficient underproduction of housing services
Full loss from rent ceiling is sum of deadweight loss and increased cost of search activity
When ceiling is lower than equilibrium surpluses shrink and loss is suffered by all
Are rent ceilings fair?
May be inefficient but might help achieve fairer allocation of scarce housing
Rent ceilings are unfair
According to fair rules, anything that blocks voluntary exchange is unfair
According to this the fairest outcome is one that allocates scarce housing to poorest people
Blocking rent adjustment decreases quantity available and creates a bigger challenge for housing market
Market must somehow ration smaller quantity of housing and allocate that housing to those willing to rent at rent ceiling
To see if rent ceilings are fair in this sense we need to consider how markets allocate scarce housing when using rent ceilin g
But according to fair result view, a fair outcome is one that benefits the less well off
When rent is not permitted to allocate scarce resources one can use other mechanisms
Lottery
Rewards those who are lucky not poor
First-come first-served
Rewards those with foresight to get on a list first, not the poor
Used to allocate housing in English after WWII
Discrimination
In public housing, it is the self-interest of bureaucracy that administers the allocation that counts
Discrimination based on friendship, family ties, and race more likely to enter equation
Can make discrimination illegal but can't stop it from occurring
In theory bureaucrats can allocate housing to satisfy criterion of fairness but not likely
Allocation based on views and self-interests of the owner
Hard to make a case for rent ceilings on the basis of fairness
When rent adjustments are blocked, other methods of allocating scarce housing operate that do not produce a fair outcome
A Labour Market with a Minimum Wage
Labour market influences jobs we get and wages we earn
Firms decide how much labour to demand, and the lower the wage rate the greater labour demanded
Households decide how much to supply and the higher the wage rate the greater quantity of labour supplied
Price floor below equilibrium has no effect
Law and market forces are in conflict
Price floor above has effects because price floor prevents price from regulating quantities demanded and supplied
Effects on a market depend crucially on whether the floor is imposed at a level that is above or below the equilibrium price
Government-imposed regulation to charge a price lower than specified level is a price floor
When low labour unions lobby for higher wages
Wage rate adjusts to make the quantity of labour demanded equal quantity supplied
Minimum wage imposed above equilibrium wage creates unemployment
When price floor is applied to labour market it is a minimum wage
Minimum Wage Brings Unemployment
Chapter 6 - Government Actions in Markets
October-11-11
8:44 PM
ECON 1000 Page 1
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