Chapter 6 Flashcards
Price ceiling
A regulation that makes it illegal to charge a price higher than a specified level.
When do rent ceilings have no effect?
If they are set above the equilibrium rent. The market works as if there were no ceiling.
If set below, however, the effects are powerful.
The effect of a rent ceiling set below the equilibrium rent
Shortage:
It decreases the quantity of rental housing.
People use resources in search activity, which decrease consumer surplus.
A deadweight loss arises.
Other mechanisms that operate when rent ceilings affect:
- Search activity
- Black markets
Why are rent ceilings unfair?
- Blocks voluntary exchange
- Does not generally benefit the poor.
How does a rent ceiling allocate scarce housing:
- Lotteries
- First come, first-served
- Discrimination
Price floor
Regulation that makes it illegal to trade at a price lower than a specified level.
Minimum wage.
A price floor applied to labour markets.
Inefficiency of a minimum wage
- A minimum wage decreases the quantity of labour employed.
- If resources are used in job search activity, firms’s surplus decrease and possibly workers’ surplus. And a deadweight loss arises.
Tax incidence
The devision of the tax burden between the buyers and the sellers.
When do taxes lead to inefficiency?
Except in the extreme cases of perfectly price inelastic demand and perfectly price inelastic supply when the quantity remains the same, imposing a tax creates inefficiency.
