Government Price Controls, Labour Markets, and Equity–Efficiency Trade-Offs

These flashcards review key concepts from the lecture on price controls, shortages and surpluses, minimum wages, rent controls, and the broader efficiency–equity debate in economic policy.

What 1973 event triggered fuel shortages and soaring Alberta oil prices?

The OPEC oil embargo, in which the Organization of Petroleum Exporting Countries restricted exports to much of the Western world.

In a free market, when does equilibrium occur?

When quantity demanded equals quantity supplied, establishing the equilibrium price and quantity.

What happens when a government fixes a price below the market-clearing level?

A shortage arises because quantity demanded exceeds quantity supplied.

What happens when a government fixes a price above the market-clearing level?

A surplus arises because quantity supplied exceeds quantity demanded.

To which quantity do actual sales adjust in a price-controlled market?

To the smaller of quantity supplied or quantity demanded.

Define a price ceiling.

A government-set maximum price that makes it illegal to charge more than the specified amount.

What unintended consequence results from rent controls?

Housing shortages, where apartments demanded exceed those supplied.

Why are rent controls sometimes defended using the Robin Hood principle?

They are framed as taking from richer landlords to benefit poorer tenants.

Name two policies that can help renters without imposing a rent ceiling.

Government income subsidies and government-supplied housing.

Define a price floor.

A government-set minimum price that makes it illegal to pay or charge less than the specified amount.

Which labour policy is a classic example of a price floor?

Minimum wage laws.

What labour-market effect can a minimum wage above equilibrium create?

Unemployment, because labour supplied exceeds labour demanded.

How does labour-demand elasticity affect unemployment from a higher minimum wage?

The more elastic the demand, the greater the drop in labour demanded and the larger the unemployment.

When can a higher minimum wage raise total worker income?

When demand for labour is inelastic, so the percentage rise in wages outweighs the percentage fall in hours worked.

List two alternatives to a minimum wage for aiding the working poor.

Skill-training programs and wage supplements (e.g., earned-income tax credits).

What is economic efficiency?

Allocation of resources so goods and services people value most are produced at the lowest possible cost, maximizing total surplus.

Why might governments accept some inefficiency?

To improve equity or fairness in the distribution of resources and opportunities.

Distinguish positive from normative economic statements.

Positive statements describe what is and can be tested; normative statements express what should be and rely on value judgments.

What are the two main concepts of equity discussed?

Equity as equal outcomes and equity as equal opportunities.

Which political orientation usually prioritizes equal outcomes?

The political left.

Which political orientation usually prioritizes efficiency over equal outcomes?

The political right, emphasising equal opportunities.

What efficiency–equity trade-off is illustrated by Canadian versus U.S. health care?

Canada’s system is more equitable but less efficient; the U.S. system is more efficient but less equitable.

When health-care prices are set too low, how does the market adjust?

Through quantity rationing in the form of waiting lists.

What is the opportunity cost of laissez-faire market outcomes?

Potential unfairness or inequality in who receives goods, services, and income.

What should policymakers examine before endorsing a proposal?

The benefits, opportunity costs, and possible unintended consequences.

In labour markets, what does Q × P represent?

Total income for workers (hours worked multiplied by wage rate).

Explain deadweight loss under rent control.

The reduction in total surplus because mutually beneficial trades between landlords and tenants are prevented by the price ceiling.

Why can landlords still wield power during rent-control shortages?

Scarcity lets them be selective and demand non-price concessions from tenants.

What principle states governments cannot compel trade at a fixed price?

While governments can set legal prices, they cannot force businesses to supply or consumers to buy at that price.

How does positive economic analysis assist after a social goal is chosen?

It identifies the most efficient means to achieve the goal, clarifying trade-offs and avoiding unintended consequences.