Warm UpShould the government control the price of goods and services? (for example, should they place a $2 price limit on a cup of coffee?)

Have hw on your desk for me to check!

Current Events

• http://www.nydailynews.com/life-style/real-estate/photos-life-hong-kong-tiniest-apartment-article-1.1273112

Government Involvement

Module 8 & 9

3

Warm Up

If you could live in any city, where would you live and why?

http://www.youtube.com/watch?v=0UjsXo9l6I8

So Far We Have Been Discussing Voluntary Exchanges But What if the Government Got Involved to Remove

The Voluntary Component?

6

So Why are there Price Ceilings (aka Maximum Legal Prices)

• Political Pressure• Persistent Shortage of a Good or Service• Continuing Black Market (illegal) Activity------------------------------------------------------------Examples of Price Ceilings include

1. WWII Wage Controls2. Oil Shortages in the 1970s3. NYC Rent Controlled Apartments

Potential Problems with a Price Ceiling:

1.Inefficient Allocation to Consumers (those willing to pay cannot have the good)

2.Wasted Resources (opportunity cost)

3.Inefficiently Low Quality4.Black Markets

So Why are there Price Controls (aka Minimum or Floor Prices)

• Political Pressure• Lack of Economic Understanding• Benefit Some------------------------------------------------------------Examples of Price Controls include

1. Agriculture (Farm Products)2. Minimum Wage3. Air Travel (until the 1980s)

Potential Problems of a Price Floor:

1.Inefficiently Low Quantity=reduces Q of goods bought and sold; raises the price of a good to consumers, it reduces the quantity of that good demanded; because sellers can’t sell more units of a good than buyers are willing to buy

2.Inefficient Allocation of Sales Among Sellers (blocking out sellers)

An episode from the Belgian movie Rosetta, a realistic fictional story, illustrates the problem of inefficient allocation of selling opportunities quite well. Like many European countries, Belgium has a high minimum wage, and jobs for young people are scarce. At one point Rosetta, a young woman who is very eager to work, loses her job at a fast-food stand because the owner of the stand replaces her with his son—a very reluctant worker. Rosetta would be willing to work for less money, and with the money he would save, the owner could give his son an allowance and let him do something else. But to hire Rosetta for less than the minimum wage would be illegal.

1.Wasted Resources2.Inefficiently High Quality

(sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.)

3.Illegal Activity

KEY TO PRICE CONTROLS AND CEILINGS

• IF the assumption is that markets are operating efficiently before any government intervention then such interventions will cause problems

• IF markets were operating inefficiently then such interventions might not cause problems and could move the market closer to efficiency.

= they can be inefficient or irrelevant depending on the market

Practice Questions1. Which of the following will occur if a legal price floor is

placed on a good below its free market equilibrium?A. Surpluses will developB. Shortages will developC. Underground markets will developD. The equilibrium price will remain the sameE. The quantity sold will increase

A. A price ceiling causes a shortage if the ceiling price is above the equilibrium priceB. A price floor causes a surplus if the price floor is below the equilibrium priceC. Price ceilings and price floors result in a misallocation of resources D. Price floors above equilibrium cause a shortage

2. Which of the following statements about price control is true?

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1. Which of the following will occur if a legal price floor is placed on a good below its free market equilibrium?

A. Surpluses will developB. Shortages will developC. Underground markets will developD. The equilibrium price will remain the same {Correct}E. The quantity sold will increase

A. A price ceiling causes a shortage if the ceiling price is above the equilibrium priceB. A price floor causes a surplus if the price floor is below the equilibrium priceC. Price ceilings and price floors result in a misallocation of resources {Correct}D. Price floors above equilibrium cause a shortage

2. Which of the following statements about price control is true?

20

Read the article and describe the problems

with rent control. Make an argument

using graphs AND your notes to convince the

Mayor of New York City to either keep or get rid

of rent control.

Bill de Blasio

Have your homework on your desk!!!

Warm Up: What are the problems and benefits of floors and ceilings?

Review: Price control= one way in which the government intervenesPrice ceiling= legal maximum price that lies below Pe. Price floor= legal minimum price that lies above Pe.Inefficient==missed opportunitieshttp://www.youtube.com/watch?v=Ct1Moeaa-W8

Controlling Quantities• A quantity control, or quota, is an

upper limit on the quantity of some good that can be bought or sold.

• A license gives its owner the right to supply a good.

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Quotas:

-upper limit of a quantity of a good that can be bought or sold

People with a license can buy/sell within the quota limits

The court has ordered the centre and the state governments to implement within three months an 18-year-old law that mandates 3% reservation in government jobs for disabled people.

Effect of a Quota on the Market for Taxi Rides

Import Quotas

A quota is a limit on the number of imports. The government sets the maximum amount that

can come in the country.Purpose:•To protect domestic producers from a cheaper world price.•To prevent domestic unemployment

The Costs of Quantity Controls - Inefficiency:- in the form of mutually beneficial transactions that

don’t occur - Anytime the demand price at a given quantity is not

equal to the supply price at that quantity, there will be missed opportunities.

- Incentives for illegal activities:

- Suppliers know that additional units could be supplied and buyers could be found. This kind of overproduction would violate the quota.

Controlling Quantities• The demand price of a given quantity is the

price at which consumers will demand that quantity.

• The supply price of a given quantity is the price at which producers will supply that quantity.

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The Market for Taxi Rides in the Absence of Government Controls

6 7 90 8 10 11 1312 14

$7.00

6.50

6.00

5.50

5.00

4.50

4.00

3.50

3.00 D

S

E

Quantity of rides (millions per year)

Fare (per ride)

$7.00$6.50$6.00$5.50$5.00$4.50$4.00$3.50$3.00

14131211109876

6789

1011121314

Quantity of rides(millions per year)Fare

(per ride)Quantity supplied

Quantity demanded

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Effect of a Quota on the Market for Taxi Rides

$7.00

$6.50

$6.00

$5.50

$5.00

$4.50

$4.00

$3.50

$3.00

14

1312

11

10

9

8

7

6

6

78

9

10

11

12

13

14

Quantity of rides(millions per year)

Fare(per ride) Quantity

suppliedQuantity

demandedA

B

6 70 8 9 10 11 12 13 14

$7.00

6.50

6.00

5.50

5.00

4.50

4.00

3.50

3.00 D

S

E

Deadweight loss

The “wedge”

Quota

Quantity of rides (millions per year)

Fare (per ride)

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The Anatomy of Quantity Controls• A quantity control, or quota, drives a wedge between the

demand price and the supply price of a good.

• The price paid by buyers ends up being higher than that received by sellers.

• The difference between the demand and supply price at the quota limit is the quota rent.

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The Costs of Quantity Controls• Deadweight loss because some mutually

beneficial transactions don’t occur.• A deadweight loss occurs when a market

is not perfectly competitive—the price is greater and the quantity is lower than in a perfectly competitive market structure.

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The Clams of New Jersey• In the 1980s, excessive fishing threatened to wipe out New

Jersey’s clam beds. • To save the resource, the U.S. government introduced a clam

quota.• This set an overall limit on the number of bushels of clams to

be caught and allocated licenses to owners of fishing boats based on their historical catches.

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1.Quantity controls, or quotas, limit the quantity of a good that can be bought or sold.

2.The quantity allowed for sale is the quota limit. 3.Economists say that a quota drives a wedge between the

demand price and the supply price.4.Quantity controls lead to deadweight loss.

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• There are many side effects to Quantity Controls or Quotas on Prices:

1. Missed Opportunities (inefficiencies)

2. Lost Gains from the Missed Opportunities(aka Dead Weight Loss)

3. Encourage Evasion (aka law breaking)

As example: Lets consider NYC Taxicabs

http://www.youtube.com/watch?v=2zisxWMu34k

What is the NBER?

What you will learnin this Module:• The meaning of price controls, one way

government intervenes in markets

• How price controls can create problems and make a market inefficient

• Why economists are often deeply skeptical of attempts to intervene in markets

• Who benefits and who loses from price controls, and why they are used despite their well-known problems

• Unpopular market prices

• Political pressure

Why Governments Control PricesWhy Governments Control Prices

• Legal maximum price• Examples

• Resource prices during WWII

• Oil Prices in1970s• California electricity• New York City apartments

• http://www.youtube.com/watch?v=R0h8kfA4i_A

Price CeilingsPrice Ceilings

Modeling a Price Ceiling

How a Price Ceiling Causes Inefficiency

• Inefficient Allocation to Consumers

• Wasted Resources

• Inefficiently Low Quality

• Black Markets

• http://www.youtube.com/watch?v=ZrNKHCCVfB8

So Why Are There Price Ceilings?

• Benefit some

• Uncertainty

• Lack of understanding

• Legal minimum price• Examples

• Agricultural products• Minimum wage• Trucking• Air travel

Price FloorsPrice Floors

Modeling a Price Floor

How a Price Floor Causes Inefficiency

• Inefficiently Low Quantity

• Inefficient Allocation of Sales Among Sellers

• Wasted Resources

• Inefficiently High Quality

• Illegal Activity

So Why Are There Price Floors?

• Benefit some

• Disregard

• Lack of understanding

Try these questions from the AP board. Most are micro questions but good to do and try just the same.

• http://apcentral.collegeboard.com/apc/public/repository/MicroEcon-Deadweight-Loss-2011.pdf

Review: Go Mr. Clifford

• http://www.youtube.com/watch?v=ZfMUS-FnaHE• http://www.youtube.com/watch?v=e0MbpaBkUPk

http://www.foxnews.com/opinion/2013/10/16/obamas-victory-on-debt-ceiling-comes-at-terrible-price/