Chapter 6

• What are the two roles of economists?


  As scientists and policy advisers
• How do economists use theories in their role as policy advisers?


  They use theories to help change the world for the better
• What has been the focus of the preceding two chapters in the study material?

  The scientific aspects of supply and demand
• What concept has been developed to gauge the size of changes in supply and demand?


  The concept of elasticity
• What types of government policies are analyzed in this chapter?


  • Policies that control prices (e.g., rent control, minimum wage)
  • Impact of taxes on market outcomes
• What is a price ceiling?


  A legal maximum on the price at which a good can be sold
• What is a price floor?


  A legal minimum on the price at which a good can be sold
• Why are price controls often enacted by policymakers?


  To address perceived unfairness in market prices
• What happens when a price ceiling is imposed below the equilibrium price?


  A shortage of the good arises
• What is the effect of a price ceiling of $4 on the ice cream market?


  The price ceiling is not binding and has no effect
• What occurs when a price ceiling of $2 is imposed in the ice cream market?


  The market price equals the price ceiling, leading to a shortage
• What are some mechanisms that may develop to ration goods under a price ceiling?


  Long lines or seller bias in distribution
• How do price ceilings affect the efficiency of markets?


  They create inefficiencies and can lead to unfair distribution
• What historical event caused long lines at gas stations in 1973?


  The OPEC reduction of crude oil production
• What was the role of government regulations in the gasoline shortage during the 1973 crisis?


  They limited the price oil companies could charge for gasoline
• What happens to the equilibrium price of gasoline when the supply curve shifts left due to increased crude oil prices?


  The equilibrium price of gasoline would rise
• What is the result of a binding price ceiling in the gasoline market?


  A severe shortage of gasoline occurs
• What is the goal of rent control policies?


  To make housing more affordable for the poor
• Why do economists criticize rent control as a policy?


  It is an inefficient way to help the poor
• How does the short-run supply and demand for housing respond to rent control?


  They are relatively inelastic, causing a small shortage
• What happens to the housing market in the long run under rent control?


  A larger shortage of housing occurs due to more elastic supply and demand
• What mechanisms do landlords use to ration housing under rent control?


  Long waiting lists and preferences for certain tenants
• What is a reduction in rents referred to as?


  Rent run
• How do buyers and sellers of rental housing respond over time?


  They respond more to market conditions as time passes
• What happens on the supply side when rents are low?


  Landlords do not build new apartments and fail to maintain existing ones
• What effect do low rents have on demand?


  They encourage people to find their own apartments and induce more people to move into the city
• What does it mean for supply and demand to be more elastic in the long run?


  It means that both supply and demand respond more significantly to changes in price
• What is the result of rent control depressing rents below the equilibrium level?


  • Quantity of apartments supplied falls substantially
  • Quantity of apartments demanded rises substantially
  • Resulting in a large shortage of housing
• What mechanisms do landlords use to ration housing under rent control?


  Long waiting lists, preference to tenants without children, and discrimination
• How do bribes affect the price of an apartment under rent control?


  They bring the total price of an apartment closer to the equilibrium price
• What happens to landlords' incentives when rent control creates shortages?


  Landlords lose their incentive to respond to tenants’ concerns
• Why do tenants receive lower rents under rent control?


  Because of the shortages created by rent control
• What are the challenges of enforcing laws against discrimination in housing?


  • Difficult and costly to enforce
  • Requires significant resources and oversight
• How does a free market regulate the price of housing?


  • Prices adjust to eliminate shortages
  • Competition among landlords improves housing quality
• What are rent control ordinances designed to do?


  Limit rent increases for some rental housing units
• What percentage of economists disagree with the positive impact of rent control?


  95%
• What is a price floor?


  A legal minimum price set by the government
• What happens when a price floor is set below the equilibrium price?


  The price floor is not binding and has no effect on the market
• What occurs when a price floor is set above the equilibrium price?


  A surplus occurs because quantity supplied exceeds quantity demanded
• What are the outcomes of a binding price floor?


  • Market price equals the price floor
  • Surplus occurs due to excess supply
  • Sellers may resort to personal biases to sell goods