ECON101 Lecture Notes - Lecture 6: Price Ceiling, Deadweight Loss, Economic Surplus

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cerisechinchilla481

31 Oct 2018

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Fatma

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ECON101 Full Course Notes

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A price ceiling or price cap is a regulation that makes it illegal to charge a price higher than the specified level. When a price ceiling is applied to a housing market, it is called a rent ceiling. If the rent ceiling is set above the equilibrium rent, then there is no effect. However if the rent ceiling is set below the equilibrium rent, then there is several effects. For instances if the equilibrium rent is a month and the rent ceiling is set at dollars a month, the equilibrium rent is in the illegal region. This is because at this rent ceiling, there quantity of housing demanded exceeds the quantity supplied (shortage of housing). Therefore, because the legal price cannot eliminate the shortage, other mechanisms operate including: search activity, black market. With a housing shortage, people are willing to pay up to a month.

Related Questions

Consider the market for rental housing in Your town. The demand and supply schedules for rental housing are given in the table.

Price ($ per month)	Quantity Demanded (thousands of units)	Quantity Supplied (thousands of units)
1100	40	80
1000	50	77
900	60	73
800	70	70
700	80	67
600	90	65
500	100	60

In a Free market for rental housing, what is the equilibrium price and quantity?
Now suppose the government in Your town decides to impose a ceiling on the monthly rental price. What is the highest level at which such a ceiling could be set in order to have any effect on the marker? Explain your answer.
Suppose the maximum rental price is set equal to $500 per month. Describe the effect on quantity demanded, supplied, and exchanged in the rental-housing market.
Suppose a black market develops in the presence of the rent controls in part (c). What is the black market price that would exist if all of the quantity supplied were sold on the black market?

harlequincrow283

1 . Effects of rent control

Rent controls force landlords to price apartments below the equilibrium price level. An immediate effect is a shortage (excess demand) of apartments, because the quantity of apartments demanded is greater than the quantity supplied at the regulated price.

When cities prevent landlords from charging market rents, which of the following are common long-run outcomes? Check all that apply.

The future supply of rental housing units increases.

The quantity of available rental housing units falls.

The quality of rental housing units falls.

Nonprice methods of rationing emerge.

blackcoyote423

Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the table below.

Rent	Demand	Supply
2,500.00	10,000	15,000
2,000.00	12,500	12,500
1,500.00	15,000	10,000
1,000.00	17,500	7,500
500.00	20,000	5,000

1. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?

2. If the local government can enforce a rent-control law that sets the maximum monthly rent at $1,500, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month?

3. Suppose that a new government is elected that wants to keep out the poor. It declares that the minimum rent that can be charged is $2,500 per month. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month?

4. Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply of housing. Assuming that demand remains unchanged, by how many units of housing would the government have to increase the supply of housing to get the market equilibrium rental price to fall to $1500 per month? To $1000 per month? To $500 per month?

salmonwombat608

ECON101 Lecture Notes - Lecture 6: Price Ceiling, Deadweight Loss, Economic Surplus

ECON101 Full Course Notes

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