chap 6 Flashcards
(33 cards)
price ceiling
a regulation that makes it illegal to charge a price higher than a specified level.
rent ceiling
When a price ceiling is applied to a housing market it is called a rent ceiling.
When the rent ceiling is above the equilibrium
If the rent ceiling is set above the equilibrium rent, it has no effect. The market works as if there were no ceiling.
When the rent ceiling is below equilibrium
A housing shortage
Increased search activity
An illicit market
Housing Shortage
rent ceiling below equilibrium
search activity.
The time spent looking for someone with whom to do business is called search activity.
When a price is regulated and there is a shortage, search activity increases.
illicit market
an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed.
A shortage of housing creates an illicit market in housing.
Illegal arrangements are made between renters and landlords at rents above the rent ceiling—and generally above what the rent would have been in an unregulated market.
Inefficiency of a Rent Ceiling
A rent ceiling set below the equilibrium rent leads to an inefficient underproduction of housing services.
The marginal social benefit from housing services exceeds its marginal social cost and a deadweight loss arises.
Are Rent Ceilings Fair
According to the fair rules view, a rent ceiling is unfair because it blocks voluntary exchange.
According to the fair results view, a rent ceiling is unfair because it does not generally benefit the poor
A rent ceiling decreases the quantity of housing and the scarce housing is allocated by
Lottery
First-come, first-served
Discrimination
price floor
a regulation that makes it illegal to trade at a price lower than a specified level.
minimum wage.
When a price floor is applied to labour markets, it is called a minimum wage.
If the minimum wage is set below the equilibrium wage rate, it has no effect. The market works as if there were no minimum wage.
If the minimum wage is set above the equilibrium wage rate, it has powerful effects.
If the minimum wage is set above the equilibrium
If the minimum wage is set above the equilibrium wage rate, the quantity of labour supplied by workers exceeds the quantity demanded by employers.
There is a surplus of labour.
The quantity of labour hired at the minimum wage is less than the quantity that would be hired in an unregulated labour market.
Because the legal wage rate cannot eliminate the surplus, the minimum wage creates unemployment.
If the minimum wage is set below the equilibrium wage rate
, it has no effect. The market works as if there were no minimum wage.
Is the Minimum Wage Fair?
Most economists believe that minimum wage laws increase the unemployment rate of low-skilled younger workers.
Inefficiency of a Minimum Wage
A minimum wage leads to an inefficient outcome.
The quantity of labour employed is less than the efficient quantity.
The supply of labour measures the marginal social cost of labour to workers (leisure forgone).
The demand for labour measures the marginal social benefit from labour (value of goods produced)
Tax incidence
the division of the burden of a tax between buyers and sellers.
If the market price rises by the full amount who pays the tax?
buyers
If the market price rises by a lesser amount than the tax who pays the tax
both buyers and sellers
If the market price doesn’t rise at all who pays the tax?
buyer
tax wedge
driven between the price the buyer pays and the price the seller receives.
With a tax, the equilibrium quantity is no longer at the intersection of the demand and supply curves.
The equilibrium quantity is the quantity where the vertical gap between the curves equals the size of the tax.
Taxes and Efficiency
Except in the extreme cases of perfectly inelastic demand or perfectly inelastic supply when the quantity remains the same, imposing a tax creates inefficiency.
Perfectly inelastic demand in tax
the buyer pays the entire tax.
Perfectly elastic demand on tax
the seller pays the entire tax
