Políticas Económicas y Efectos de Mercado: Pisos y Techos de Precios

Impact of Price Policies on the Market - Scarcity and Queue Context:

• Long queues in supermarkets, as observed in the HEB example where people had to wait to find basic products like milk, are a clear indicator that supply does not meet demand. This implies market inefficiency or a shortage of products.
• Unlike extreme situations where one would expect to wait hours to buy groceries or basic necessities, normal markets allow direct entry into stores, with limited waits only at the checkout.#### Key Concepts: Price Floors and Ceilings - Height Dilemma (High vs. Low): A common source of confusion is determining whether a price limit (floor or ceiling) should be high or low to be effective. This is crucial for the exam.
• Price Floor:
• Definition: A legally established minimum price.
• Effectiveness: For a price floor to be effective, it must be set $\textbf{above}$ the market equilibrium price. If set below, it will have no impact on the actual market price as the market will naturally tend to operate above that floor.#### Price Ceilings: The Case of Rent Control - Problem to Address: The high cost of housing. This is a problem that affects many people.
• Policy Proposal: Impose a price ceiling, known as rent control, to limit the cost of rent.
• Empirical Consequences of Rent Control:
• Lack of Incentive: There is no incentive to maintain the supply or quality of housing. Landlords do not see a return on investment in improvements or maintenance.
• Housing Deterioration: The housing stock deteriorates at much faster rates in cities with rent control.
• Examples of Deterioration: Landlords will not repair elevators, mold, or lead paint, as they cannot recover those costs, leading to property neglect. A tenant recounted how their apartment was falling apart, with black mold and paint falling off, and management ignored it to evict them, renovate, and raise the rent.
• History and Economic Consensus:
• Rent control was implemented in the U.S. between $1941$ and $1964$. However, it was abandoned due to the unanimous opposition of prominent economists.
• This sentiment persists today. Surveys of economists (like that by IMG) show that only $2\text{ percent}$ believed that rent control in places like New York and San Francisco had a positive impact on housing affordability.
• Other studies have shown that the elimination of rent control has had a positive impact on communities.#### Alternatives to Rent Control: Fostering Supply - Tax Reduction Policy: Reduce the tax burden for builders of new housing units. This can be illustrated as a policy that will increase supply.
• Mechanism: By reducing the cost of building (an input cost), the production of more housing is incentivized.
• Positive Results:
• Increased supply without a shortage.
• Price falls and quantity increases $\textbf{without a shortage or deadweight loss}$.
• Increased total surplus (consumer and producer).
• It does not present the economic disadvantages observed with rent control.
• Challenge: Building new units takes time (units are not built overnight), making this solution slower to implement.#### Anti-Gouging Laws (Price Gouging) and Non-Binding Price Ceilings - Scenario: In emergency situations (e.g., people without electricity who need generators), prices can rise sharply. Anti-gouging laws seek to limit this price increase.
• Price Ceiling (Price Maximum): A maximum price is imposed so that the price does not rise 'too much'.
• Non-Binding Price Ceiling: It is crucial to understand that a price ceiling can be non-binding. If the maximum price is set $\textbf{above}$ the equilibrium price, it will not have an extraordinary effect on the market. The market would naturally operate below or at that level, making the 'ceiling' irrelevant.
• Policy Impact: The size and existence of the effect of a price ceiling largely depend on the characteristics of the supply and demand for the good in question; it is not always as 'clear' as the case of rent control.#### Upcoming Topics - The course will continue with the completion of Chapter $6$ and the beginning of Chapter $7$ in the next session.