MODULE 10 Flashcards
(13 cards)
What is a Market intervention and why are price controls the main forms it takes?
Why do price controls create deadweight losses?
A type of market intervention, a policy, imposed by government to prevail over the market forces of supply and demand
Rent Control
Equilibrium price does not necessarily please either buyers or sellers.
Developers argued that the difficulty they have dislodging rent, controlled tenant limits, their ability to build more housing, leading to a shortage of all apartments, whether affordable or expensive 
When a government intervenes to regulate prices…
It imposes PRICE CONTROL
When a government tries to legislate prices, there are certain predictable and unpleasant side effects
When Marcus are any fishing, price controls, don’t necessarily cause problems and can potentially move the market closer to efficiency.
If a price ceiling is it above the equilibrium price it won’t have any effect. The price ceilings won’t be binding, it won’t actually constrain market behavior.
Any shortage induced by price controls can be seriously harmful because it leads to an efficiency. How?
There are gains from trade that go on realized.
How do price ceilings create an efficiency? The 4 ways:
- reduces quantity of apartments rent it below the efficient level.
- Inefficient allocation of apartments among would be renters.
- Waste of time and effort as people search for apartments.
- Leads landlord to maintain apartments in inefficiently, low quality or condition.
The lost surplus associate it with the transactions that no longer occur due to the market intervention. (The shaded area of the triangle under supply but below demand.)
DEADWEIGHT LOSS
If policymakers are worried about high prices, they would want to implement a maximum price. If they are worried about low prices, they would want to implement a minimum price. Price control is binding if it alters market participants’ behaviors.
