A Housing Market with a Rent Ceiling:

Price Ceiling(or Price Cap):

A Housing Market with a Rent Ceiling:

Rent Ceiling:

A Housing Market with a Rent Ceiling:

If the rent ceiling is priced above the equilibrium rent, then:

it has no effect

the market works like there is no ceiling

A Housing Market with a Rent Ceiling:

If the rent ceiling is priced below the equilibrium rent, then:

the quantity of housing demanded exceeds the quantity supplied and there is a shortage of housing. 

this causes the market to be not efficient and under produce housing. resulting in a deadweight loss

A Housing Market with a Rent Ceiling:

because the legal price cannot eliminate the shortage of housing, ______ and ______ occur.

• search activity
• black markets

A Housing Market with a Rent Ceiling:

Search Activity:

the time spent looking for someone with whom to do business

when price is regulated and there is a shortage, search activity increases

A Housing Market with a Rent Ceiling:

Black Markets:

an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed

illegal arrangements are made between renters and landlords at rents above the rent ceiling- usually higher than what rent would have been in an unregulated market

A Labor Market with a Minimum Wage:

Price Floor:

A Labor Market with a Minimum Wage:

Minimum Wage:

A Labor Market with a Minimum Wage:

A minimum wage set below the equilibrium wage rate:

has no effect

the market works as if there were no minimum wage

A Labor Market with a Minimum Wage:

a Minimum wage set above the equilibrium wage rate:

the quantity of labor supplied exceeds the quantity of labor demanded, causing a surplus of labor

end result: Unemployment and Deadweight loss

A Labor Market with a Minimum Wage:

A Minimum wage leads to an ______ outcome.

Inefficient

the quantity of labor employed is less than the efficient quantity, causing a deadweight loss

there is also increased job search, and higher job search costs by workers add to the loss from the minimum wage

A Labor Market with a Minimum Wage:

Inefficiency of Minimum Wage:

Supply of Labor=

Demand for Labor=

Supply of Labor= marginal social cost of labor to workers

Demand for Labor= marginal social benefit from labor

Taxes:

Tax Incidence:

Taxes:

Tax Incidence:

If the price of the tax ____ then....

• rises by the full amount of the tax, the buyers pay the tax
• rises by a lesser amount of the tax, both the buyers and sellers share the burden of the tax
• does not rise at all, the sellers pay the tax

Taxes:

Tax Incidence:

Buyers respond to the price ____ the tax, because....

Taxes:

Tax Incidence:

Sellers respond to the price ____ the tax, because....

Taxes:

Statutory Incidence of a Tax:

indicates who is legally responsible for the tax (the producer or the consumer)

it is not an economic tax

Taxes:

Economic Incidence of a Tax:

the change in the distribution of private real income induced by a tax

ie: the amount the suppliers actually pay and the amount the consumers actually pay

Taxes:

Tax imposed on the Seller:

Supply decreases 

the curve S+tax on sellers is used to show the new supply curve

Taxes:

Tax imposed on Buyers:

Demand decreases 

the curve D-tax on buyers is used to show the new demand curve

Tax:

Tax Wedge:

Taxes:

The division of the tax between buyers and sellers depends on:

two extreme cases of this are:

the elasticities of demand and supply

• perfectly inelastic demand
• perfectly elastic demand

Taxes:

the more inelastic the demand:

Taxes:

Elasticity of demand:

Perfectly inelastic demand:

buyers pay the entire tax

the demand curve is vertical

Taxes:

elasticity of demand:

perfectly elastic demand:

sellers pay the entire tax

the demand curve is horizontal

Taxes:

Elasticity of supply:

two extreme cases:

• perfectly inelastic supply
• perfectly elastic supply

Taxes:

the more elastic the supply:

Taxes:

elasticity of supply:

perfectly inelastic supply:

sellers pay the entire tax

the supply curve is verical

Taxes:

elasticity of suppy:

Perfectly elastic supply:

buyers pay the entire tax

the supply curve is horizontal

Taxes:

Taxes and Efficiency:

taxes drive a wedge between what buyers pay and sellers receive

also put a wedge between marginal cost and marginal benefit creating inefficiency

quantity produced is less than the efficient quantity, this decreased quantity creates deadweight loss

Taxes:

Two conflicting principles of fairness that apply to a tax system:

• the benefits principle
• the ability-to-pay principle

Taxes:

the Benefits principle:

the proposition that people should pay taxes equal to the benefits they receive from the services provided by the government

Taxes:

the Ability-to-Pay principle:

Production Subsidies and Quota:

intervention in markets takes two main forms:

• production quota
• subsidies

Production Subsidies and Quota:

Production Quota:

an upper limit to the quantity of a good that may be produced during a specified period

only have an impact if they are set below the equilibrium level of output in a market

results in a decrease in quantity supplied, a rise in price, a decrease in marginal cost, inefficiency from underproduction, and an incentive to cheat and overproduce

Production Subsidies and Quota:

Subsidies:

a payment made by the government to a producer

it increases the supply, it lower the price paid by buyers and raises the price received by sellers

deadweight loss is created

Market for Illegal Goods:

Market for Illegal Goods:

Penalties on Sellers:

supply of the drug decreases to new supply curve S+CBL

New equilibrium created,

the price rises and the quantity decreases

Market for Illegal Goods:

Penalties on Buyers:

demand for the drug decreases to new demand curve, D-CBL

new equilibrium created

market price falls and the quantity decreases

the opportunity cost of buying this illegal good increases above the original equilibrium price because the buyer pays the market price PLUS the cost of breaking the law

Market for Illegal Goods:

Penalties on both Buyers and Sellers:

with both the buyers and sellers penalized for trading in the illegal drug, both the demand for the drug and the supply of the drug decrease

new equilibrium created: above it is what buyer pays, below it is what seller receives