ECN 104 Chapter Notes - Chapter 6: Price Controls

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Chapter 6 supply, demand and government policies. Price ceiling a legal maximum on the price of a good or service, e. g. rent control. Price floor a legal minimum on the price of a good or service, e. g. minimum wage. Taxes government can make buyers or sellers pay a specific amount on each unit sold/bought. Price controls often intend to help the poor, but often hurt them more than help. In the long run, supply and demand are more price-elastic so shortage is larger. With a shortage, sellers must ration the scares goods among the large number of potential buyers. Some rationing mechanisms: long lines i(cid:374)effi(cid:272)ie(cid:374)t a(cid:374)d waste (cid:271)uye(cid:396)"s ti(cid:373)e, dis(cid:272)(cid:396)i(cid:373)i(cid:374)atio(cid:374) a(cid:272)(cid:272)o(cid:396)di(cid:374)g to selle(cid:396)"s (cid:271)ias the good doesn"t go to buyers who value it most highly. By contrast, when prices are not controlled, the rationing mechanism is efficient. Mi(cid:374)i(cid:373)u(cid:373) wage laws do(cid:374)"t affe(cid:272)t highly skilled wo(cid:396)ke(cid:396)s because their equilibrium wages are well above the minimum, but increase teen unemployment rate.

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