Question

3. Price Controls: Many have argued that the problems of poverty can be alleviated through the use of controls in labor and housing markets. Consider the following two types of controls. (a) Consider the market for housing in an inner-city. Suppose the current equilibrium rent is $1000 per month for an apartment. Draw this market. In order to make housing more affordable, the city has enacted a rent control mandating rents be fixed at $700 per month. Explain who benefits and who loses from this legislation. What are the long-term effects from the standpoint of consumers and producers? How will the market for rental housing change over time? Has the policy met its goal of fighting poverty?

(b) Consider a local labor market for manufacturing workers. Suppose the current equilibrium wage is $10 per hour. In order to raise wages, the government has enacted a minimum wage of $15 per hour in this industry. Analyze the effects of this legislation using graphs and considering the short-run, long-run, and incentive effects of the legislation.

(c) Given your analysis in parts a and b, do these policies achieve their desired results? Why are these policies popular? Are these policies efficient from an economic point of view? Are they equitable?

(d) Discuss at least one policy for each of the above problems which may do a better job of helping those living in poverty

Answer 1

a)The current equilibrium is $1000 while the mandated one is $700. This would mean a lower price than market equilibrium which would lead to a higher demand and lower supply. This would create excess of demand of apartments and shortage of supply.

The short run effects would be emergence of black market because the sellers would want to sell at a higher price and hence would either not register their apartments or illegally put them up at higher prices.

The long run effects would be that the supply would eventually increase but there would be low quality apartments. The sellers would have either neglected the maintenance or used cheap quality goods in construction materials etc.

There would also be black market for the apartments. So the goal would not be achieved because the poor would still not be able to afford the rents in black markets, though the ones who would get it at the price ceiling would be better off but they would be in less number .

b)In this case, the price floor is above the equilibrium price and hence binding in nature. In this case , there would be less demand and excess supply ie the firms would demand less labour but there would be excess supply of labour because of higher minimum wage in the market.

Since the number of workers employed would be lower than that at equilibrium. Also those who are employed would be better off but also there would be unemployment which does not exist at market equilibrium.

In long run , the firms might substitute thr workers with capital if the employment of capital is less costly and more efficient. Also this would lead to large unemployments.

c) These policies though are popular, are not efficient because they cause deadweight loss. In both the cases there would be deadweight loss ie the welfare loss of society as a whole. Also these policies would not give desired results because of presence of black markets, rationing etc.

d)In case of minimum wage, food stamps could be used. This would imply that the food expenditure is being saved and could be utilised in other expenditure which would also help increase the utility of the consumers.

Also in rented apartments case, the government could provide part payments to the suppliers of apartments and the poor people could pay a part payment ie rent could be at subsided rate Such that the suppliers and the people demanding apartments both are benefitted.