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Chapter 3: Government Intervention

Chapter 3: Government Intervention. Market Intervention. Price Ceiling An imposed maximum allowable price of a good and service; e.g., rent control Price Floor An imposed minimum allowable price of a good and service; e.g., minimum wage. Rent Control Policy.

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Chapter 3: Government Intervention

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  1. Chapter 3: Government Intervention

  2. Market Intervention • Price Ceiling • An imposed maximum allowable price of a good and service; e.g., rent control • Price Floor • An imposed minimum allowable price of a good and service; e.g., minimum wage

  3. Rent Control Policy • Set the rent at a price above the market price to support low income families • Rent control create a shortage and develops conditions for a black market • Rent control also contributes to the deterioration of low income housing as building owners would not want to maintain these units

  4. Effect of Rent Control Policy r=Market rent r2=Controlled rent r1=Black market rent Rent D S r1 Shortage=h1h2 r r2 D S h1 h h2 No. of rental units

  5. Rent Control & Increased Demand • An increase in the demand of housing will result in a higher rent • Higher rent induces the supply of housing as builders find it more profitable to invest • If rent in this market were controlled, the increase in supply would not happen; it would rather cause a larger shortage

  6. Effect of Rent Control D’ Rent D S S’ r1 Shortage=hh3 r2 r D’ D S’ S h h1 h2 h3 Quantity

  7. Minimum Wage Law • Purpose • Improve the wage paid to unskilled labor in order to improve their living conditions • Trend from 1980 to 2000 • Increased from $3.10 to $5.15 • Decreased from 47% of the average earnings to 37% • Reduced from 98% of the poverty level to 79%

  8. Demand for Labor • Labor resources firms are willing and able to employ at various wages • Determinates of labor demand: • Price of the product • Labor productivity • Marginal Revenue Product = • Product Price * Marginal Product of Labor

  9. Market Demand for Labor D Wage A W1 B W2 D=MRP E1 E2 Employment

  10. Supply of Labor • Labor resources workers are willing and able to sell at various wages • Substitution effect: change in hours of work in response to a wage change (positive) • Income effect: change in hours of work in response to an income change (usually negative)

  11. Market Supply of Labor Positive Sub. Effect > Negative Income Effect Wage S B W2 W1 A S E1 E2 Employment

  12. Labor Market Equilibrium Wage D S A W Demand=Supply D S Employment E

  13. Effect of Minimum Wage S Wage D Unemployment=AB=1.25 A B 6.00 5.00 D S 8 9 9.25 Employment

  14. Effect of Minimum Wage Alternative Analysis S D Wage Minimum wage results in no unemployment As long as it remains in the intermediate range 6.00 5.00 D S 8 9 Employment

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