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Economics (213)
01:220:102 (140)
Chapter 6

Chapter 6 Government Action in Markets Outline Notes

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Department
Economics
Course
01:220:102
Professor
Erin Fairweather
Semester
Fall

Description
AHousing Marketwith a Rent Ceiling Thursday,February21,2013 12:47 PM • Price Ceiling or Price Cap- government regulation that makes it illegal tocharge a price higher than a specifiedlevel • Rent Ceiling- a price ceiling that is appliedto a housing market ○ Arent ceiling setbelow the equilibrium rent creates  Ahousing shortage  Increasedsearchactivity  Ablackmarket • AHousing Shortage ○ Ashortage occurs when the quantity of housing demanded exceeds the quantity of housing supplied • IncreasedSearch Activity-the time spentlooking for someone with whom to do business ○ Uses time and resources when other goods have a shortage, somay end up making the full cost of housing higher than it would be without a rent ceiling • Black Market- illegal marketinwhich the equilibrium price exceeds the price ceiling • Inefficiencyof a Rent Ceiling ○ Setbelow the equilibrium rent results in an inefficientunderproduction of housing services ○ Marginal social benefit of housing exceeds its marginal social cost and a deadweight loss shrinks the producer and consumer surplus • Are Rent Ceilings Fair? ○ According to the fair rules view, anything that blocks voluntary exchange is unfair, sorent ceilings are unfair ALaborMarket with a Minimum Wage Thursday,February21,2013 1:09PM • PriceFloor- a government imposed regulation that makes itillegal tocharge a price lower than a specifiedlevel • MinimumWage-pricefloor applied to a labor market • Minimum WageBrings Unemployment ○ When a minimum wageis setabove the equilibrium wage,there is a surplus of labor  Demand for labor determines the level of employment, and the surplus of labor is unemployed • InefficiencyofMinimum Wage ○ Minimum wagefrustrates the market mechanism and results in unemployment and increased job search • Is theMinimum WageFair? ○ Unfair:delivers anunfair resultand imposes an unfair rule ○ Resultunfair becauseonly those people who have jobs and keep them benefit from the minimum wage  Unemployed end up worse off than they would be with no minimum wage ○ Rule unfairbecauseit blocks voluntary exchange  Firms willing to hire more, but are unable to becauseof the minimum wagelaw Taxes Thursday,February21,2013 1:17PM • TaxIncidence- divisionof the burden of a tax between buyers and sellers ○ When government imposes a tax on the sale of a good, the price paid by buyers might rise by the full amount of the tax, by a lesseramount, or not at all • ATax on Sellers ○ Supply curve shifts upwith additional tax • Tax onBuyers ○ Lowers the amount they are willing to paysellers, soitdecreases demand and shifts the demand curve leftward • Equivalence of Tax on Buyers and Sellers ○ CanWe Share the Burden Equally?  When a tra
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