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Chapter 6

Chapter 6 - ECON 1000

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York University
ECON 1000
Sam Lanfranco

Chapter 6 Government Actions in MarketsOctober1111844 PMA Housing Market with a Rent CeilingMost of our income is spent on housingWhen rents are high renters lobby the government for limits on rentsGovernment regulation that makes it illegal to charge a price higher than specified level is a price ceiling or a price capEffects of a price ceiling on a market depend crucially on whether the ceiling is imposed at a level that is above or below equilibrium priceIf above then there is no effect because it does not constrain market forcesIf below then there are powerful effectsPrevents the price from regulating quantities demanded and supplied force of law and market are in conflictRent ceiling set below equilibrium rent createsA housing shortageAt equilibrium quantity demanded is equal to quantity suppliedIn housing quantity of housing supplied equals quantity of housing demandedWith a rent set below equilibrium demand exceeds supply and there is a shortage of housingWith a shortage the quantity available is quantity supplied and must be allocated among frustrated demandersResults in increased search activityIncreased search activityTime spent looking for someone to do business is search activityFrustrated wouldbe renters scan papers for housing ads and death noticesOpportunity cost is equal to its price and value of search time spent finding goodOpportunity cost of housing is equal to rent and time and other resources spent searching for the restricted quantityUses time and other resources like phone calls automobiles and gasoline thatRent ceiling may make full cost of housing higher than without rent ceilingBlack marketIllegal market in which equilibrium price exceeds price ceilingExample scalpers sell tickets for big eventsWith price ceilings renters find more ways to make moneyCharge high prices for cheap drapes or key money exorbitant price for new locksLevel of black market related to how tightly rent ceiling is enforcedWhen loose black market rent is similar to unregulated rentWhen strict black market rent is equal to the maximum price a renter is willing to payInefficiency of a Rent CeilingA rent ceiling set below equilibrium results in inefficient underproduction of housing servicesMarginal social benefits exceed marginal social cost and deadweight loss shrinks producer and consumer surplusWhen ceiling is lower than equilibrium surpluses shrink and loss is suffered by allFull loss from rent ceiling is sum of deadweight loss and increased cost of search activityAre rent ceilings fairMay be
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