Chapter 6 Flashcards
Price ceiling (or price cap)
A regulation that makes it illegal to charge a price higher than a specified level.
The effects of a price ceiling on a market depend crucially on whether the ceiling is imposed at a level that is ________________________.
The effects of a price ceiling on a market depend crucially on whether the ceiling is imposed at a level that is above or below the equilibrium price.
A price ceiling set above the equilibrium price has _______.
A price ceiling set above the equilibrium price has no effect.
The reason is that the price ceiling does not constrain the market forces. The force of the law and the market forces are not in conflict.
A price ceiling below the equilibrium price has ________.
A price ceiling below the equilibrium price has powerful effects on a market
The reason is that the price ceiling attempts to prevent the price from regulating the quantities demanded and supplied. The force of the law and the market forces are in conflict.
Rent ceiling
A regulation that makes it illegal to charge a rent higher than a specified level.
A rent ceiling set below the equilibrium rent creates: 3 things
A housing shortage
Increased search activity
A black market
In a housing market, when the rent is at the equilibrium level, the ________ of ________ equals the _______ of ________ and there is neither a shortage nor a surplus of housing.
In a housing market, when the rent is at the equilibrium level, the quantity of housing supplied equals the quantity of housing demanded and there is neither a shortage nor a surplus of housing.
At a rent set below the equilibrium rent, the quantity of housing demanded ________ the quantity of housing supplied—there is a shortage.
at a rent set below the equilibrium rent, the quantity of housing demanded exceeds the quantity of housing supplied—there is a shortage.
So if a rent ceiling is set below the equilibrium rent, there will be a shortage of housing.
Search activity
The time spent looking for someone with whom to do business.
We spend some time in search activity almost every time we make a purchase. When you’re shopping for the latest hot new cellphone, and you know four stores that stock it, how do you find which store has the best deal? You spend a few minutes on the Internet, checking out the various prices. In some markets, such as the housing market, people spend a lot of time checking the alternatives available before making a choice.
When a price is regulated and there is a shortage, search activity ________.
When a price is regulated and there is a shortage, search activity increases.
In the case of a rent-controlled housing market, frustrated would-be renters scan the newspapers, not only for housing ads but also for death notices! Any information about newly available housing is useful, and apartment seekers race to be first on the scene when news of a possible supplier breaks.
the opportunity cost of housing is equal to the ________ plus ________________.
the opportunity cost of housing is equal to the rent (a regulated price) plus the time and other resources spent searching for the restricted quantity available
Search activity is costly. It uses time and other resources, such as phone calls, automobiles, and gasoline that could have been used in other productive ways.
Black market
An illegal market in which the equilibrium price exceeds the legally imposed price ceiling.
Black markets occur in rent-controlled housing and many other markets. For example, scalpers run black markets in tickets for big sporting events and rock concerts.
The level of a black market rent depends on how tightly the rent ceiling is enforced. With loose enforcement, the black market rent is ________ to the unregulated rent. But with ________ enforcement, the black market rent is equal to the maximum price that a renter is willing to pay.
The level of a black market rent depends on how tightly the rent ceiling is enforced. With loose enforcement, the black market rent is close to the unregulated rent. But with strict enforcement, the black market rent is equal to the maximum price that a renter is willing to pay.
A rent ceiling set below the equilibrium rent results in an ________________ of housing services.
A rent ceiling set below the equilibrium rent results in an inefficient underproduction of housing services.
The marginal social benefit of housing exceeds its marginal social cost and a deadweight loss shrinks the producer surplus and consumer surplus
Fig 6.2
Figure 6.2 shows this inefficiency. The rent ceiling ($800 per month) is below the equilibrium rent ($1,000 per month) and the quantity of housing supplied (60,000 units) is less than the efficient quantity (80,000 units).
the full loss from the rent ceiling is the _______ of the deadweight loss and the increased cost of search.
the full loss from the rent ceiling is the sum of the deadweight loss and the increased cost of search.
When the rent is not permitted to allocate scarce housing, what other mechanisms are available, and are they fair? Some possible mechanisms are:
A lottery
First-come, first-served
Discrimination
A lottery allocates housing to ______________, not to those who are poor
A lottery allocates housing to those who are lucky, not to those who are poor
First-come, first-served (a method used to allocate housing in England after World War II) allocates housing to those _____________, not to the poorest.
First-come, first-served (a method used to allocate housing in England after World War II) allocates housing to those who have the greatest foresight and who get their names on a list first, not to the poorest.
Discrimination allocates scarce housing based on __________________.
Discrimination allocates scarce housing based on the views and self-interest of the owner of the housing.
Price floor
A regulation that makes it illegal to trade at a price lower than a specified level.
A price floor set below the equilibrium price has __________________
A price floor set below the equilibrium price has no effect
The reason is that the price floor does not constrain the market forces. The force of the law and the market forces are not in conflict.
A price floor set above the equilibrium price has __________________
A price floor set above the equilibrium price has powerful effects on a market
The reason is that the price floor attempts to prevent the price from regulating the quantities demanded and supplied. The force of the law and the market forces are in conflict.
Minimum wage
A regulation that makes the hiring of labour below a specified wage rate illegal. The lowest wage at which a firm may legally hire labour.