ECON 101 Study Guide - Midterm Guide: Demand Curve, Opportunity Cost, Deadweight Loss
Economics 101 Chapter 5 Notes
Price Controls and Quotas: Meddling with Markets:
Whenever a government tries to dictate either a market price or a market quantity that’s
different from the equilibrium price or quantity, the market strikes back in predictable ways;
supply and demand allows us to predict this
Rent control: a law that prevents landlords from raising rents except when given permission
Equilibrium doesn’t necessarily please either buyers or sellers
There is often a strong political demand for governments to intervene in market
Price Control: when a government intervenes to regulate price
Price Ceiling: upper limit of price
Price Floor: lower limit of price
Markets can sometimes be inefficient
For ex. When a market is dominated by a monopolist, a single seller that has the power to
influence the market price
When markets are inefficient, price controls don’t necessarily cause problems and can
potentially move the markets closer to inefficiency
Aside from rent control, there aren’t many price ceilings
Price ceilings are typically imposed during crises- because they often lead to price increases
that hurt many people but produce big gains for a lucky few
Rent control in NY-is a legacy of World War II
Price ceilings cause shortages if they are set below the equilibrium
If price ceilings are above equilibrium, they will not cause shortages
Rent control, like all price ceilings, can be seriously harmful;
Price ceilings create inefficiency in at least 4 ways
1. Reduces the quantity of apartments rented below efficient level
2. It typically leads to inefficient allocation of apartments among would-be renters
3. Leads to wasted time and effort as people search for apartments
4. Leads landlords to maintain apartments in inefficiently low quality or condition
Can also give rise to illegal behavior as people try to circumvent them
Inefficiently Low Quality:
Market equilibrium leads to the right quantity of goods and services because that quantity
maximizes sum of producer and consumer surplus
Deadweight Loss: lost surplus associated with the transactions that no longer occur due to
market intervention; economists often call triangles of lost surplus- deadweight loss
triangle
Deadweight loss is a key concept in econ: it is a loss to society since it is a reduction of
total surplus not a transfer of surplus
Additional inefficiencies- inefficient allocation to consumers, wasted resources, and
inefficiently low quality- lead to a loss of surplus over and above the deadweight loss
The greater the deadweight loss the larger the reduction in the quantity of apartments
rented the more likely it is that renters as a whole lose
Inefficient Allocation to Consumers:
Rent control can also lead to misallocation of the apartments that are available
Price ceilings often lead to inefficiency in the form of inefficient allocation to consumers:
some people who want the good badly and are willing to pay a high price don’t get it, and
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ECON 101 Full Course Notes
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Document Summary
Whenever a government tries to dictate either a market price or a market quantity that"s different from the equilibrium price or quantity, the market strikes back in predictable ways; supply and demand allows us to predict this. Rent control: a law that prevents landlords from raising rents except when given permission. Equilibrium doesn"t necessarily please either buyers or sellers. There is often a strong political demand for governments to intervene in market. Price control: when a government intervenes to regulate price. When a market is dominated by a monopolist, a single seller that has the power to influence the market price. When markets are inefficient, price controls don"t necessarily cause problems and can potentially move the markets closer to inefficiency. Aside from rent control, there aren"t many price ceilings. Price ceilings are typically imposed during crises- because they often lead to price increases that hurt many people but produce big gains for a lucky few.
