Macroeconomics Price Ceilings/Price Floors/Taxes
(Summary of book)
Markets In Action
Price Ceilings
A price ceiling is a government regulation of the maximum price that may be legally charged. To see how a price ceiling works, we’ll examine its effects in a market for rental housing, when it is called a rent ceiling.
A Rental Housing Market
The demand for and supply of rental housing determine the equilibrium rent and the equilibrium quantity of rental housing available. A rent ceiling tries to change the rent. The effects of a rent ceiling depend crucially on whether the ceiling is binding or not binding. A rent ceiling is not binding if it is set above the equilibrium rent. A rent ceiling is binding if it set below the equilibrium rent. Let’s see how scarce housing resources get allocated in the face of a binding rent ceiling by examining two groups of mechanisms:
- Lottery, queue and discrimination
- Black market
Lottery, Queue and Discrimination
The time spent looking for someone with whom to do business is called search activity. The opportunity cost of a good is equal not only to its price but also to the value of the time spent searching the good.
Black Market
A black market is an illegal market in which the price exceeds the legally imposed price ceiling.
Inefficiency of Rent Ceilings
Without a rent ceiling, the market determines the equilibrium rent and equilibrium quantity of housing. In this situation, scarce housing resources are allocated efficiently. Marginal social benefit equals marginal social cost.
Price Floors
A price floor is a regulation that makes it illegal to trade at a price lower than the specified level. Price floors are used in many markets. But when a price floor is applied to labor markets, it is called a minimum wage.
A Labor Market
In the labor market, employers are on the demand side and workers are on the supply side. The effects of a minimum wage depend crucially on whether the minimum is binding or not binding. A minimum wage is not binding
Markets In Action
Price Ceilings
A price ceiling is a government regulation of the maximum price that may be legally charged. To see how a price ceiling works, we’ll examine its effects in a market for rental housing, when it is called a rent ceiling.
A Rental Housing Market
The demand for and supply of rental housing determine the equilibrium rent and the equilibrium quantity of rental housing available. A rent ceiling tries to change the rent. The effects of a rent ceiling depend crucially on whether the ceiling is binding or not binding. A rent ceiling is not binding if it is set above the equilibrium rent. A rent ceiling is binding if it set below the equilibrium rent. Let’s see how scarce housing resources get allocated in the face of a binding rent ceiling by examining two groups of mechanisms:
- Lottery, queue and discrimination
- Black market
Lottery, Queue and Discrimination
The time spent looking for someone with whom to do business is called search activity. The opportunity cost of a good is equal not only to its price but also to the value of the time spent searching the good.
Black Market
A black market is an illegal market in which the price exceeds the legally imposed price ceiling.
Inefficiency of Rent Ceilings
Without a rent ceiling, the market determines the equilibrium rent and equilibrium quantity of housing. In this situation, scarce housing resources are allocated efficiently. Marginal social benefit equals marginal social cost.
Price Floors
A price floor is a regulation that makes it illegal to trade at a price lower than the specified level. Price floors are used in many markets. But when a price floor is applied to labor markets, it is called a minimum wage.
A Labor Market
In the labor market, employers are on the demand side and workers are on the supply side. The effects of a minimum wage depend crucially on whether the minimum is binding or not binding. A minimum wage is not binding