Government Actions in Markets PDF

Government Actions in Markets Part 1: Price Ceilings, Floors, and Quotas Road Map Price Ceilings Price Floors Quotas Welfare implications of each Review Knowledge Check Definitions Price ceiling (price cap) – a government regulation that makes it illegal to charge a price...

Government Actions in Markets Part 1: Price Ceilings, Floors, and Quotas Road Map Price Ceilings Price Floors Quotas Welfare implications of each Review Knowledge Check Definitions Price ceiling (price cap) – a government regulation that makes it illegal to charge a price higher than a specified level Price floor – a government regulation that makes it illegal to charge a price lower than a specified level When price regulations have an effect (to be discussed), they result in a deadweight loss, and inefficient quantity  good $5 Price Ceilings gov says can't charge more than $6 No effect - Price ceiling (price cap) – a government regulation that makes it illegal to charge a price higher than a specified level The effects of a price ceiling depend on whether the ceiling is set at a level above or below equilibrium price (whether it is binding) Set above equilibrium price – no effect Set below equilibrium price – has an effect, binding, prevents price from regulating quantity demanded and quantity supplied  Price Ceilings The effects of a price ceiling depend on whether it is set at a level above or below equilibrium price (whether it is binding) Set above equilibrium price – no effect Set below equilibrium price – has an effect, binding, prevents price from regulating quantity demanded and quantity supplied D ffect P & S - S ceiling PE ↓PE --- ----- 8)... i i Pc · ceiling a age -QE I B Q QE ! D Q Rent Ceiling ex. NYC Rent ceiling – a price ceiling applied to a housing market Set below equilibrium rent creates: 1. Housing shortage 2. Increased search activity 3. An illegal market Rent Ceiling 1. Housing shortage Normally with housing QD = QS, but with a ceiling QS < QD, a shortage Housing must be allocated among many demanders Increased search activity Rent Ceiling 1. Housing shortage Normally with housing QD = QS, but with a ceiling QS < QD, a shortage Housing must be allocated among many demanders Increased search activity 2. Increased search activity Search activity – time spent looking for someone with whom to do business Time spent on search is costly, increases inefficiency Opportunity cost includes what you give up in buying the good, but also the value of search time spent finding the good Full cost of housing = rent + search cost, could be higher than without ceiling  Rent Ceiling 3. Illegal market activity Encourages illegal trading Ex. High price for worthless fittings (ex. Drapes) or new locks and keys “key money” here search costs might P maximum illegal rent to 1200 market S be incurred up ↓ (miss 1200-- = 400 illegal rental 800 ceiling or pay price ! D $1200 Q QE O  Welfare Effects of a Price Ceiling PSI TSI DWL created Before After P P S 40 40 g n 34 ÷ - - - - - -. CS CS IDWL. 30 - - - - - - - ¥ - - - - ! ! ps 22 ! ceiling ÷ ☐ no ! ! p 10 i , 6 10 Q 10 Q Cs : (40-34×6-0) (E) + (34-22716-0)=90 TS=CS Ps + Ps : (22-10×6-0) (1-2)--36 501-100 = 150 TS : 90+36=126 DWL :( 34-227110 - 6) (E) = 24  Welfare Effects of a Price Ceiling Before P After S P , 40 40 5 34 ÷; - - - - - - CS CS IDWL. 30 - i - - - - - - - - - - 1 , ! ' ps i. 22 i ¥ ceiling to D no !. p 10 Q 6 10 Q 2 Effects: Transfer (Redistribution) and Deadweight loss (loss of total surplus) 1) Some surplus is transferred from producer to consumer 2) Deadweight loss (DWL) occurs because quantity is now below efficient quantity, some surplus is lost to society as a whole  Maximum Potential loss from search maximum (ble from Possibility * potential loss P maximum price S housing search consumers wip CS ↓ ⑨ - - - - - - - potential ! Full loss : 1 loss DWL from / search I PWL t increased i ceiling of search PS cost D Q - Price Ceilings, Who wins and loses? Who benefits: People who already have an apartment (Generally, families that have lived there a long time) People lucky enough to find a place Who loses: Everyone else, mobile newcomers Allocation methods when rent not an option: lottery, first-come first- served, discrimination. None of these specifically aid those of low income.  $ 5 good Price Floors Government says can't charge less than $4 - No effect Price floor – a government regulation that makes it illegal to charge a price lower than a specified level The effects of a price floor depend on whether the floor is set at a level above or below equilibrium price (whether it is binding) Set below equilibrium price – no effect Set above equilibrium price – has an effect, binding, prevents price from regulating quantity demanded and quantity supplied, DWL and inefficient quantity  Price Floors The effects of a price floor depend on whether it is set at a level above or below equilibrium price (whether it is binding) Set below equilibrium price – no effect Set above equilibrium price – has an effect, binding, prevents price from regulating quantity demanded and quantity supplied P No effect ② S ↑ S surplus floor pF - · ae 8 ↑ pe------ ③ PE ------ 8. floor B i D ⑪ Q QF at Q  Minimum Wage Minimum wage – a price floor applied to the labor market When it is binding, workers firms quantity of labor supplied > quantity of labor demanded  Surplus of labor: unemployment ) Pcslpehr Slabor Workers to supply want more unemployment PF - Tpe firms demand minimum - -. - f.. - I wage labor than l l l l l l l l t l l , 1 i 1 ☐ Labor , , I \ I QF←QE Q( billions of hours per yr )  2 of created : types unemployment Minimum wage 1) A← > B ) amount of people working at PE P($ pehr S Labor who now are not ) unemployment hours ( worked before but PF , - Minimum TPE - - - - - I - - I wage not demanded now i ! ! 2. Bec I 1 I People not at PE 1 i 1 working ' i 1 ☐ Labor who are willing to work I 1 PF 1 at but can't find i i work Q( ① QE billions of hours ) ) ( per yr hours wouldn't have been worked A B C at PE but now available Minimum wage, Who wins and loses? Who wins? People who were employed at a wage below minimum wage who keep their jobs, people who gain jobs at this new minimum wage Who loses? People who were employed at a wage below minimum wage who lose their jobs People who can’t find a job at minimum wage that they would have been able to get at equilibrium price  Cst Tst Welfare Effects of a Price Floor DWL created Before P After P 40 S 40 S ↳ cs so 34 CS 18 CS PS 100 ' floor ' Ps 108 ID 30 " Ts Iso - - - - - - - - - i PS i TS 126 ps DWL 24 22 - I D - - - - to ' ° Q 10 ! ! D 6 10 Q 2 Effects: Transfer (Redistribution) and Deadweight loss (loss of total surplus) 1) Some surplus is transferred from consumers (firms) to producers (workers) 2) Deadweight loss (DWL) occurs because quantity is now below efficient quantity, some surplus is lost to society as a whole  Potential loss from search ximum ( ) maximum Possibility * potential loss from iDWLP.fi Slabor job search CS floor potential loss from Full loss ! DWL + increased pj - - - - ☐ Labor cost of search Q Minimum wage Important note: amount of unemployment caused by the minimum wage will depend on the slope of the labor demand curve, or the elasticity of demand for labor mmmmmmmmm Too in-depth for the exam, but if you are interested in learning more, see me during office hours Quotas We talked about price regulations, moving on to quantity regulations Production quota – an upper limit to the quantity of a good that may be produced in a given period Like price controls, quotas only have an effect if they are binding i.e. a quota set above equilibrium quantity has no effect but one set below equilibrium quantity is binding and has an effect  Quotas Effects: Cst Tst P S PTQIV DWL created P¥, inefficient underproduction pa ?_? 1. Some surplus transferred from -. Tpe. - consumers to producers 2. DWL created, production less ÷ , than efficient quantity, inefficient underproduction, society loses ' some surplus / : QE Incentive to cheat and overproduce Quota Q ← Review Price ceilings set below equilibrium price result in shortages and DWL Price floors set above the equilibrium price cause surpluses and DWL Quotas set below the equilibrium quantity causes inefficient underproduction and DWL Minimum wages create unemployment due to a surplus of labor supplied Workers may either lose their jobs or have trouble finding new jobs Those who retain their jobs experience a gain in income Knowledge Check $7350 What is the equilibrium P and Q? ! What happens if a price floor is set at $6? No effect What happens if a price floor is set at $9? (has effect Binding an Triangle = =