Government Actions in Markets

Price Ceiling

• Price ceiling/price cap - a regulation that makes it illegal to charge a price higher than a specified level
• Rent ceiling - a price ceiling is applied to a housing market
  • If the rent ceiling is set above the equilibrium rent, it has no effect

When the ceiling is below equilibrium

• If the demand at the ceiling exceeds the supply, other mechanisms may operate
  • Increased search activity
  • A black market

Unintended Consequences

udget line generated from the substituion effect

• Low incentives to satisfy the need of the current tenants
• Discrimination - landlords become more picky when there's excess demand

Black market

• An illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed
• Illegal arragements between renters and landlords
  • Rent above the rent ceiling
  • Generally higher than the rent in a regulated market

Price Floor

• A regulation that makes it illegal to trade at a price lower than a specified level
• Minimum wage - price floor applied to labour markets
  • If it is set below the equilibrium wage rate, it has no effect

When the floor is above the equilibrium

• The quantity of labour supplied exceeds the quantity demanded and unemployment is created