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Demand and Supply Regulation

The document discusses government policies on markets, specifically focusing on price controls such as price ceilings and price floors, along with the impact of taxes. It highlights examples like rent control and minimum wage, illustrating how these policies can lead to shortages and inefficiencies in markets. Additionally, it evaluates the unintended consequences of price controls, noting that they may harm the very groups they are intended to help.

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Lynet Beverly Machakwa
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15 views14 pages

Demand and Supply Regulation

The document discusses government policies on markets, specifically focusing on price controls such as price ceilings and price floors, along with the impact of taxes. It highlights examples like rent control and minimum wage, illustrating how these policies can lead to shortages and inefficiencies in markets. Additionally, it evaluates the unintended consequences of price controls, noting that they may harm the very groups they are intended to help.

Uploaded by

Lynet Beverly Machakwa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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GOVERNMENT

POLICIES ON MARKETS
Price ceilings, price floors and taxes
Government Policies
• Price controls
• Price ceiling: a legal maximum on the price
of a good or service. Example: rent control.
• Price floor: a legal minimum on the price of
a good or service. Example: minimum wage.
• Taxes
• The gov’t can make buyers or sellers pay a specific
amount on each unit bought/sold.
Application 1: The Market for gasoline

Price of gas in P SL
litres

$1.00
Eq’m
Eq’m w/o
w/o
price
price controls
controls

D
Q
300
Government Policy: Quantity of gasoline
Make gasoline affordable..
(billion of litres)
Price Ceilings on the Market
P SL
• Cannot charge
anyone more
than $0.50 a
litre. $1.00
• The ceiling
is binding on the Price
$0.50
price, and ceiling
causes a shortage
shortage in the D
Q
market 200 300 400
Shortages and Rationing
• With a shortage, sellers must ration the goods among
buyers. Some rationing mechanisms:
• Long lines…
• Black market…side payments…

• These mechanisms are inefficient: the goods don’t


necessarily go to the buyers who value them most highly.
Application 2: The market for unskilled labour

Wage W S
paid to
unskilled
workers
$6
Eq’m
Eq’m w/o
w/o
price
price controls
controls

D
L
500
Quantity of
unskilled workers
Good and bad news
The minimum wage
Unemployment
Min wage laws W
do not affect S
Min.
highly skilled $10
wage
workers.
They do affect $6
teen workers.
Studies:
A 10% increase
in the min wage D
raises teen L
unemployment 400 600
by 1-3%.
Minimum wage in Canada
https://www.huffingtonpost.ca/2016/07/19/youth-
unemployment-canada_n_11072350.html
Average youth unemployment rate of E.U. with and
without minimum wages
Real versus nominal minimum wages
Evaluating Price Controls

 Prices are the signals that guide the allocation of


society’s resources. This allocation is altered when
policymakers restrict prices.
 Price controls are often intended to help the poor, but
they often hurt more than help them:
• The minimum wage can cause job losses.
• Rent control can reduce the quantity and quality of
affordable housing.
• No free lunch…..

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