1. Warm-up: September 26, 2014 A. Read both articles about rent control in San Francisco. B. Answer the following questions in your notes: 1. Explain (in general terms) how rent control works in San Francisco, based on the information given. 2. How, exactly, are the “rich getting richer” because of rent controls? 3. What are the pros and cons of rent control policy? Who wins? Who loses?

2. Why Governments Control Prices (2/22/16) I.Why price controls? fairness II.Price ceilings: prices cannot legally exceed the upper limit A. Example: rent control in NYC Unregulated: market equilibrium at point B Imposed ceiling: price falls to P MAX, quantity supplied is less than quantity demanded = SHORTAGE

3. B. Causes inefficiency 1. Reduced # of apts available Loss of surplus due to price ceiling (triangle DBE) = DEADWEIGHT LOSS Consumer surplus = ADEP MAX Producer surplus = CEP MAX Winners: people who already rent Losers: apt hunters and landlords

4. 2. Inefficient allocation to consumers a. People who really need an apt may not get one, those who aren’t so urgent have one 3. Wasted resources a. People waste time, resources to look for apts b. Another example: 1979 gas shortages 4. Inefficiently low quality a. No incentive for landlords to maintain apts 5. Black markets a. Subletting, bribery

5. In order to ingratiate himself with voters, the mayor of Gotham City decides to lower the price of taxi rides. Assume, for simplicity, that all taxi rides are the same distance, and therefore, cost the same. Price (per ride)Quantity Demanded (millions) Quantity Supplied (millions) $7.001012 6.5011 6.001210 5.50139 5.00148 4.50157 a. Assume there are no restrictions on the number of rides supplied. Find the equilibrium price and quantity. b. Suppose the mayor sets a price ceiling at $5.50. How large is the shortage of rides? Illustrate with a diagram. Who benefits and who loses with this policy? c. Suppose the stock market crashes and people are now poorer. This reduces the quantity of rides demanded by 6 million rides per year at any given price. What effect will the mayor’s new policy have now? Illustrate this on the same diagram from part b.

6. 9/29 III. Price floors: prices cannot legally fall below imposed limit Price above equilibrium  quantity supplied exceeds quantity demanded = SURPLUS Examples: minimum wage, agricultural products

7. A.Causes inefficiently low quantity 1.New consumer surplus = blue triangle 2.New producer surplus = red trapezoid 3.Deadweight loss = purple triangle

8. B. Inefficient allocation of sales among sellers 1. People willing to work for less cannot C. Wasted resources 1. Ag products: govt buys surpluses, often destroys them 2. Workers waste time looking for jobs D. Inefficiently high quality 1. Price floor on transatlantic flights: people don’t want lavish meals, they want cheaper flights E. Illegal activity: example – getting paid “under the table”

9. The accompanying table shows hypothetical demand and supply schedules for milk per year. The US government decides that the incomes of dairy farmers should be maintained at a level that allows the traditional family dairy farm to survive. So it implements a price floor of $1 per pint by buying surplus milk until the market price is $1 per pint. Price of milk (per pint) Quantity of milk demanded (millions) Quantity of milk supplied (millions) $1.20550850 1.10600800 1.00650750 0.90700 0.80750650

10. a.In a diagram, show the deadweight loss from the inefficiently low quantity bought and sold. b. How much surplus milk will be produced as a result of this policy? The government will buy all surplus milk at $1 each. What will be the cost to the government because of this policy? (hint: surplus milk = extra milk pints, NOT consumer or producer surplus) c. Since milk is an important source of protein and calcium, the government decides to provide the surplus milk it purchases to elementary schools at a price of only $0.60 per pint. Assume that schools will buy any amount of milk available at this low price. But now parents reduce their purchases of milk at any price by 50 million pints per year because they know that their children are getting milk at school. How much will the dairy program now cost the government?

11. VI. Controlling Quantities (9/30) A quantity control, or quota, is an upper limit on the quantity of some good that can be bought or sold. A license gives its owner the right to supply a good. The demand price of a given quantity is the price at which consumers will demand that quantity. The supply price of a given quantity is the price at which producers will supply that quantity. Examples of quotas: taxi rides in NYC, fishing quotas

12. The Market for Taxi Rides in the Absence of Government Controls 679081011131214 $7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 D S E Quantity of rides (millions per year) Fare (per ride) $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 14 13 12 11 10 9 8 7 6 6 7 8 9 11 12 13 14 Quantity of rides (millions per year) Fare (per ride) Quantity supplied Quantity demanded Demand price for 10 million rides = $5 Supply price for 10 million rides = $5

13. Effect of a Quota on the Market for Taxi Rides $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 14 13 12 11 10 9 8 7 6 6 7 8 9 11 12 13 14 Quantity of rides (millions per year) Fare (per ride) Quantity supplied Quantity demanded A B 670891011121314 $7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 D S E Deadweight loss The “wedge” Quota Quantity of rides (millions per year) Fare (per ride) Demand price for 8 million rides = $6 Supply price for 8 million rides = $4

14. The Anatomy of Quantity Controls A quota drives a wedge between the demand price and the supply price of a good The difference between the demand and supply price at the quota limit is the quota rent, the earnings that accrue to the license-holder from ownership of the right to sell the good.

15. The Costs of Quantity Controls Deadweight loss because some mutually beneficial transactions don’t occur. Incentives for illegal activities.

16. 1. Which of the following will occur if a legal price floor is placed on a good below its free- market equilibrium? (A) Surpluses will develop. (B) Shortages will develop. (C) Underground markets will develop. (D) The equilibrium price will ration the good. (E) The quantity sold will increase. 2. Which of the following statements about price controls is true? (A) A price ceiling causes a shortage if the ceiling price is above the equilibrium price. (B) A price floor causes a surplus if the price floor is set below the equilibrium price. (C) A price ceiling causes an increase in demand if the ceiling price is set below the equilibrium price. (D) A price ceiling causes a decrease in demand if the price ceiling is set above the equilibrium price. (E) Price ceilings and price floors result in a misallocation of resources. 3. Assume that the fast-food industry is perfectly competitive and employs only one factor of production: unskilled workers. Use supply and demand analysis to explain how the increase in the wage rate resulting from the imposition of the minimum wage will affect each of the following in the fast-food industry in the short run. (i) Price of fast food (ii) Quantity of fast food produced

17. Price of lobsterQuantity Demanded (thousands of lbs) Quantity Supplied (thousands of lbs) $220360 20 320 1840280 1660240 1480200 12100160 10120 814080 616040 41800 Practice problem (will help with HW #5) 1.In the absence of government restrictions, what is equilibrium price and quantity? 2.The government places a yearly quota of 80,000 lbs of lobster harvested. What is the demand price for 80,000 lbs? What is the supply price? What is the quota rent per lb? 3.Calculate consumer surplus and producer surplus based on your answers in #2.

18. An effective price ceiling in the market for good X likely results in (A) a persistent surplus of good X (B) a persistent shortage of good X (C) an increase in the demand for good Y, a substitute for good X (D) a decrease in the demand for good Z, a complement with good X (E) a rightward shift in the supply curve of good X A consequence of a price floor is (A) a persistent shortage of the good (B) an increase in total welfare (C) a persistent surplus of the good (D) elimination of deadweight loss (E) an increase in quantity demanded and a decrease in quantity supplied

19. Write your own econ problems! You will be writing 2 supply and demand word problems. In each problem, you will have to include the following: Supply and demand schedules for some product (must have at least 5 different prices), and graph; find equilibrium A scenario that shifts either supply or demand Calculation of consumer and/or producer surplus (before and/or after the shift) – since you have clear supply and demand schedules, you MUST calculate surplus using the step by step method! The institution of a price control (ceiling, price floor, OR a quota) Some sort of analyzation based on the price control Work out the answers to your problems. Then, trade one problem with a partner and have them solve it.

20. Problem example: Corn dogs PriceQD (millions) QS (millions) $7060 61050 52040 430 34020 25010 1600 a. Graph the S&D schedules, find equilibrium b.Calculate the consumer and producer surplus (using the step by step method). c.Suppose people realize that corn dogs are junk food and decrease their consumption by 20 million corn dogs at any given price. i.Draw the new demand curve. ii.What is the new equilibrium? iii.Calculate the new consumer and producer surplus (using the step by step method). d.The government sets a price floor at $4 per corn dog. What is the effect of this price floor on the market for corn dogs?