Effects of Government Interventions in Markets

Rent Control and Deadweight Loss

• Rent control limits how much landlords can charge for rent

• While rent control helps make housing more affordable, it can lead to deadweight loss (DWL), where more people want to rent than there are available homes at the lower prices

• This creates inefficiency, as the overall benefit from housing isn't maximized

• Landlords may also not want to keep or build rental units because they get less money from them, leading to fewer choices and lower quality housing

Minimum Wage and Price Floors

• Minimum wage is the lowest amount workers can be paid

• setting a price floor can lead to more people looking for jobs than available jobs, causing unemployment among low-skilled workers

• non-binding price ceiling = a maximum price set above the equilibrium price, which does not affect the market outcome because the market price is already lower

• non-binding price floor = a minimum price set below the equilibrium price, which similarly does not affect the market outcome since the market price is already higher

• binding price ceiling = a maximum price set below the equilibrium price, which results in a shortage of goods as the quantity demanded exceeds the quantity supplied, leading to potential long-term issues such as reduced product quality and supply

• binding price floor = a minimum price set above the equilibrium price, which creates a surplus of goods as the quantity supplied exceeds the quantity demanded, often resulting in wasted resources and market inefficiencies

• price floors cause shortages

• price ceilings cause surpluses

How Price Controls Reallocate Surplus

• quota = a government-imposed limit on the amount of a specific good that can be produced or sold

  • leads to restricted supply and increased prices, while potentially benefiting certain producers at the expense of consumer choice

• Price controls mess with the natural flow of supply and demand, causing shifts in who benefits in the market

Taxation and DWL

• taxes can reduce total surplus and create market inefficiency

• taxes increase the price buyers pay and lower the price sellers receive

  • this creates a wedge between supply and demand

  • result: fewer transactions happen

• some beneficial trades don't occur, even though buyers and sellers would’ve both gained

  • this lost potential surplus = deadweight loss (DWL)

  • DWL = the value of lost trades that no longer happen due to the tax

Taxes and Perfectly Inelastic Demand

• If demand is perfectly inelastic, consumers pay the full tax because they will buy the same amount no matter the price change

Taxes and Perfectly Elastic Demand

• if demand is perfectly elastic, the tax hits producers instead, leading to fewer sales. this causes sellers to lose out and creates deadweight loss