Rizzo started class by writing 4 things on the boards. The first thing was The Economics of Price Controls: price ceiling à rent controls
The second thing was a supply and demand curve for the rental apartments market along with a price ceiling at $800 but the equilibrium price is $1000. Market equilibrium P*=$1,000; Q*=12,000
Controlled equilibrium; P=$800 QD=14,000; Qs=10,000 Notice that more quantity is wanted than supplied. This equilibrium is not market clearing.
PRICE CEILING IS BINDINNG BECAUSE IT FORCES THE SHORTAGE. BINDING WHEN THE CEILING IS BELOW THE EQUILLIBRIUM PRICE. NON BINDING IF ABOVE THE PRICE
A price ceiling is the quickest way to destroy a city.
Rent- something that acrews to you with out producing more. This means that you get more money without doing anything extra.
A lot of things that we do in a day comes from rent.
Supply of housing is very elastic.
Landlords supply 10,000 but 14,000 are wanted. Price ceiling causes the shortage here. The price ceiling is binding when there are shortages IF the ceiling is higher than the equilibrium price, then it is ok. This doesn’t cause a shortage. Sellers have their goals satisfied with a ceiling but buyers don’t in price ceilings.
Something has to make QD’=QS’=10,000
The gas shortages in the 1970’s caused huge lines for gas because there was inflation, but a price ceiling on gas so it was considered very cheap. It made the cost of obtaining gas higher than the low sticker price.
Price ceilings make the quality of apartments decrease because if you don’t like something, someone else will deal with it. If there’s roaches, then the apartment administrators can’t afford to fix the problem if the price ceiling is only at $800.
THE CONSEQUENCES OF RENT CONTROLS
1. Reduced availability- harder to get the apartment.
2. Low quality
3. Other $ will be paid. Black markets emerge because people are willing to pay more than $800 for the apartment.
4. Misalocations- people that value things the most aren’t going to always get them, even if they are willing to pay more for it.
5. Impacts other markets. Raises the price in other markets. Ex. Increases the demand in locations outside of NYC so suburbs raise their price to the ceiling since more people are willing to pay that higher price.
6. Fairness- makes it harder for the poor to get things.
7. Discrimination and other costs result.- It’s less costly to discriminate because there is a bigger market of people to choose from. Market clearing means that no one else is available. There isn’t someone right there to fill it out. More costly to turn people down. By not renting to people, they still do social good because still renting it to someone else. Consumers can discriminate against supplier but suppliers can’t discriminate against consumers. This is an interesting point.
8. Monitoring/enforcing police. Police have to regulate and monitor to make sure that the law isn’t broken. 3 costs come from this.
1. Long run supply curve shifts in and becomes flatter. It is costly to keep going to court and hiring lawyers for both state and supplier.
2. The monitoring itself is destructive. People monitoring aren’t producing goods and services people want. Broken window. Rather have people build a park than check leaky pipes. Goal should always be no regulation. If it works, don’t regulate it. Buying locks shouldn’t go to GDP because it is wasteful. We shouldn’t have to worry about being safe in a perfect market.
3. Costly because police could build a bridge or do something that is more productive. We have to raise taxes if we want to build a bridge with regulation because more costs are needed to pay for bridge and police salaries. We shouldn’t say FU to the poor. Destroying the housing stock would help the poor the most.
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