GOVERNMENT ACTIONS IN MARKETS (A Housing Market with a Rent Ceiling …
GOVERNMENT ACTIONS IN MARKETS
A Housing Market with a
A price ceiling set above the equilibrium price
has no effect.
But a price ceiling below the equilibrium price has
powerful effects on a market.
When a price ceiling is applied to a housing market,
it is called a rent ceiling
A Housing Shortage
At the equilibrium price, the quantity demanded e
quals the quantity supplied
Increased Search Activity
The time spent looking for someone with whom to do business is called search activity .
In some markets, such
as the housing market, people spend a lot of time
checking the alternatives available before making a
When a price is regulated and there is a
shortage ,search activity increases.
A Black Market
A rent ceiling also encourages illegal trading in a black
market , an illegal market in which the equilibrium
price exceeds the price ceiling.
A Labour Market with a
A government regulation that makes it illegal to charge a price lower than a specified level is called a
price floor .
A price floor set below the
equilibrium price has no effect.
a minimum wage
When a price floor is applied to a labour market, it
is called a minimum wage .
Minimum Wage Brings Unemployment
So when a minimum wage is set above the equilibrium
wage, there is a surplus of labour.
Inefficiency of a Minimum Wage
In the labour market, the supply curve measures the marginal social cost of labour to workers.
This cost is leisure forgone
Tax incidence is the division of the burden of a taxbetween buyers and sellers
Tax incidence does not depend on the tax lawThe
law might impose a tax on sellers or on buyers, but
the outcome is the same in either case.
A Tax on Sellers
A tax on sellers is like an increase in cost, so it
A Tax on Buyers
A tax on buyers lowers the amount they are willing to pay sellers, so it decreases demand and shifts the demand curve leftward
Production Quotas and Subsidies
In the markets for milk, eggs, and poultry (among others), governments have, from time to time, imposed production quota
A production quota is an
upper limit to the quantity of a good that may be
produced in a specified period.
A Rise in Price
The production quota
lowers the marginal cost of producing milk.
An Incentive to Cheat and Overproduce
quota creates an incentive for farmers to
cheat and produce more than their individual production
An increase in supply
■ A fall in price and increase in quantity produced
An increase in marginal cost
■ Payments by government to farmers