ECON201_-_Chapter_5
Chapter Overview
Title: Price Controls and Market Efficiency
Author: Ragan
Edition: Seventeenth Canadian Edition
Learning Objectives
5.1 Government-Controlled Prices
Describe effects of price ceilings and price floors on equilibrium price and quantity.
5.2 Rent Controls: A Case Study of Price Ceilings
Compare short-run and long-run effects of rent controls.
5.3 Market Efficiency
Describe relationship between economic surplus and market efficiency.
Explain inefficiencies caused by price controls and output quotas.
5.1 Government-Controlled Prices
Disequilibrium Prices
Key Concept: Voluntary market transactions require both buyer and seller participation.
Supply & Demand Balance:
Quantity demanded < quantity supplied: demand sets exchange amount.
Quantity demanded > quantity supplied: supply sets exchange amount.
In disequilibrium, exchanged quantity is determined by the lesser of demand/supply.
Price Floors
Definition: Minimum permissible price for goods/services.
Effect: Leads to excess supply when binding.
Example: Minimum wage acts as a price floor in labor market.
Application: Minimum Wages and Unemployment
Consequences:
Employment level decreases.
Quantity of labor supplied increases.
Result: Increase in unemployment.
Impact on firms: Higher wage costs affect profits negatively.
Employment Impacts
Some workers benefit from higher wages while keeping jobs.
Others may lose their jobs due to minimum wage policies.
5.2 Rent Controls: A Case Study of Price Ceilings
Predicted Effects of Rent Controls
Binding controls lead to:
Shortage of rental housing due to higher demand than supply.
Adoption of alternative allocation schemes.
Emergence of hidden markets.
Short-Run vs. Long-Run Effects of Rent Controls
Short-run: Supply remains constant (perfectly inelastic supply curve).
Long-run: Supply decreases as fewer units are offered, exacerbating shortages.
Case Study: Rent Controls in Ontario
Historical Overview
1975: Rent control instituted, limiting rent increases.
1990s: Shortage in rental market, particularly acute in Metro Toronto.
Post-2017: Renewed controls generated backlash; exemptions for new units introduced.
Who Gains and Who Loses?
Gain: Existing tenants in controlled accommodations.
Loss: Landlords (reduced returns) and potential future tenants (decreased housing availability).
Policy Alternatives
Government can subsidize housing production or create public housing to tackle shortages.
Direct income assistance for lower-income households as another strategy.
Consideration of resource costs for policies is essential.
5.3 An Introduction to Market Efficiency
Analyzing effects of controlled prices on society: balance between benefits (to some) and costs (to others).
Questions of how minimum wage and rent controls affect overall societal welfare.
Demand as "Value"
The demand curve reveals consumer willingness to pay, illustrating perceived value of goods.
Supply as "Cost"
The supply curve indicates the minimum acceptable price for producers, reflecting their costs.
Economic Surplus and Market Efficiency
Total Economic Surplus: Area between demand and supply curves, maximized at free-market equilibrium.
Market Inefficiencies with Price Controls
Deadweight Loss: Loss of economic surplus due to binding price controls, be it ceilings or floors.
A Cautionary Word
Government interventions often aim to assist specific groups but lead to broader inefficiencies.
Economists focus on positive analyses to understand actual policy outcomes, leaving normative judgments to policymakers.
Applying Economic Concepts
Price Gouging Debate
Extreme events can prompt scarcity; higher prices can lead to efficient resource allocation but spark ethical questions about profit-seeking behavior during crises.