Chapter 6 Flashcards
Price Ceiling
A gov’t regulation that makes it illegal to charge a price higher than a specified level
Effects of the Price Ceiling
The effects of a P.C. on a market depends CRUCIALLY on whether the ceiling is imposed at a level above or below the equilibrium price.
Rent Ceiling
A price ceiling that is applied to a housing market
What happens when the rent ceiling is set below the equilibrium rent?
1) Creates a housing shortage
2) Increases search activity
3) Creates a black market
Search Activity
Time spent looking for someone with whom to do business with.
[Opportunity cost of a is not only equal to its price, but also the value of the search time spent finding the good.]
yes.
Black Market
An illegal market in which the equilibrium price exceeds the price ceiling.
What makes the rent ceiling inefficient?
A rent ceiling that is set below the equilibrium rent results in an inefficient underproduction of housing services.
1 ) The marginal social benefit of housing exceeds its marginal social cost
2 ) A deadweight loss shrinks the producer surplus and consumer surplus.
Are rent ceilings fair?
A fair outcome is one that benefits the less well off, so in terms of allocating rent…
- a lottery - first-come, first-served - discrimination
…are all ways to possible mechanisms to get rent, however they are not particularly fair.
Price Floor
A government regulation that makes it illegal to charge a price lower than a specified level.
Minimum Wage
A price floor that is applied to a labor market.
Effects of Minimum Wage
At Equilibrium - no shortage/no surplus of labor
Above the Equilibrium - the quantity of labor exceeds the quantity of labor demanded [surplus of labor]
Is minimum wage fair?
It is unfair on both views of fairness:
1) It delivers an unfair result b/c only those who have jobs and keep them benefit from the minimum wage
[the unemployed end up worse off than they would be with no minimum wage dude to increased cost of job search]
2) It imposes an unfair rule b/c it blocks voluntary exchange
[firms are willing to hire more labor if they are willing and able but are not permitted due to minimum wage law]
Why is minimum wage inefficient?
1) Frustrates the market mechanism and results in unemployment and increased job search
2) At the quantity of labor employed, the marginal social benefit of labor exceeds its marginal social coast and a deadweight loss SHRINKS the firms’ surplus and the worker’s surplus.
- Because the quantity of labor employed is less than the efficient quantity, there is a deadweight loss.
