Economics 1021A/B Lecture 6: Chapter 6 Government Actions in Markets

• School: Western University
• Department: Economics
• Course: Economics 1021A/B
• Professor: Nicholas Kanhert

Document Summary

In competitive markets, underproduction or overproduction arise when there are: A regulation that makes it illegal to charge a price higher than a specified level. When a price ceiling is applied to a housing market it is called a rent ceiling. A rent ceiling above equilibrium rent has no effect (market works normally). A rent ceiling set below the equilibrium rent creates: housing shortage, increased search activity, black market. At the rent ceiling, the quantity of housing demanded exceeds the quantity supplied. Because the legal price cannot eliminate the shortage, other mechanisms operate: The time spent looking for someone with whom to do business. Search activity is costly: opportunity cost of housing = rent (regulated) + the cost of search activity (unregulated) The quantity of housing is less than the quantity in an unregulated market, the opportunity cost of housing exceeds the unregulated rent.