class: center, middle, inverse, title-slide # Policy Levers: Price Controls ## EC 201: Principles of Microeconomics ### Kyle Raze ### Winter 2020 --- class: inverse, middle # Prologue --- # Policy Levers ## Price controls > Policies that impose legal limits on the market prices of particular goods or services. -- Why do governments impose price controls? 1. Help disadvantaged groups. 2. Manage affordability of certain goods. 3. Curry favor with important interest groups. --- # Price Controls ## .pink[Price floor] Establishes a legal .pink[minimum] price. - Prices below the floor are illegal. - .pink[Examples:] Agricultural price supports, minimum wages laws, *etc.* ## .purple[Price ceiling] Establishes a legal .purple[maximum] price. - Prices above the ceiling are illegal. - .purple[Examples:] Price-gouging laws, rent control, *etc.* --- class: inverse, middle # Price Floors --- # Price Floor .footnote[.pink[<span>†</span>]: For price floors, *binding* .mono[=] set above the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-1-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a binding.super[.pink[<span>†</span>]] price floor affect the market price and quantity? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price Floor </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $7.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[D] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[S] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> P.sub[Market] </td> <td style="text-align:center;line-height: 110%;"> $5.50 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> </tbody> </table> ] --- count: false # Price Floor .footnote[.pink[<span>†</span>]: For price floors, *binding* .mono[=] set above the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-3-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a binding.super[.pink[<span>†</span>]] price floor affect the market price and quantity? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price Floor </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $7.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[D] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> 3 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[S] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> 6 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> P.sub[Market] </td> <td style="text-align:center;line-height: 110%;"> $5.50 </td> <td style="text-align:center;line-height: 110%;"> $7.00 </td> </tr> </tbody> </table> ] --- # Price Floor .footnote[.pink[<span>†</span>]: For price floors, *binding* .mono[=] set above the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-5-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a binding.super[.pink[<span>†</span>]] price floor affect total surplus in an efficient market? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price Floor </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $7.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> CS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> PS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> TS </td> <td style="text-align:center;line-height: 110%;"> $20.25 </td> <td style="text-align:center;line-height: 110%;"> \( \qquad \, \ \ \) </td> </tr> <tr> <td style="text-align:left;"> DWL </td> <td style="text-align:center;"> $0.00 </td> <td style="text-align:center;"> </td> </tr> </tbody> </table> ] --- count: false # Price Floor .footnote[.pink[<span>†</span>]: For price floors, *binding* .mono[=] set above the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-7-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a binding.super[.pink[<span>†</span>]] price floor affect total surplus in an efficient market? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price Floor </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $7.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> CS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> $4.50 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> PS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> $13.50 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> TS </td> <td style="text-align:center;line-height: 110%;"> $20.25 </td> <td style="text-align:center;line-height: 110%;"> $18.00 </td> </tr> <tr> <td style="text-align:left;"> DWL </td> <td style="text-align:center;"> $0.00 </td> <td style="text-align:center;"> $2.25 </td> </tr> </tbody> </table> ] --- # Price Floor .footnote[.pink[<span>†</span>]: For price floors, *non-binding* .mono[=] set below the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-9-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a non-binding.super[.pink[<span>†</span>]] price floor affect the market price and quantity? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price Floor </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $3.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[D] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[S] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> P.sub[Market] </td> <td style="text-align:center;line-height: 110%;"> $5.50 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> </tbody> </table> ] --- count: false # Price Floor .footnote[.pink[<span>†</span>]: For price floors, *non-binding* .mono[=] set below the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-11-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a non-binding.super[.pink[<span>†</span>]] price floor affect the market price and quantity? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price Floor </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $3.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[D] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[S] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> P.sub[Market] </td> <td style="text-align:center;line-height: 110%;"> $5.50 </td> <td style="text-align:center;line-height: 110%;"> $5.50 </td> </tr> </tbody> </table> ] --- # Price Floor .footnote[.pink[<span>†</span>]: For price floors, *non-binding* .mono[=] set below the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-13-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a non-binding.super[.pink[<span>†</span>]] price floor affect total surplus in an efficient market? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price Floor </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $3.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> CS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> PS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> TS </td> <td style="text-align:center;line-height: 110%;"> $20.25 </td> <td style="text-align:center;line-height: 110%;"> \( \qquad \; \; \; \) </td> </tr> <tr> <td style="text-align:left;"> DWL </td> <td style="text-align:center;"> $0.00 </td> <td style="text-align:center;"> </td> </tr> </tbody> </table> ] --- count: false # Price Floor .footnote[.pink[<span>†</span>]: For price floors, *non-binding* .mono[=] set below the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-15-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a non-binding.super[.pink[<span>†</span>]] price floor affect total surplus in an efficient market? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price Floor </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $3.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> CS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> PS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> TS </td> <td style="text-align:center;line-height: 110%;"> $20.25 </td> <td style="text-align:center;line-height: 110%;"> $20.25 </td> </tr> <tr> <td style="text-align:left;"> DWL </td> <td style="text-align:center;"> $0.00 </td> <td style="text-align:center;"> $0.00 </td> </tr> </tbody> </table> ] --- # Price Floor .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-17-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How can sellers eliminate the surplus of goods? ] --- count: false # Price Floor .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-18-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How can sellers eliminate the surplus of goods? **A:** .pink[Sell the surplus goods on the black market for $4 per unit.] ] --- # US Dairy Price Supports .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-19-1.svg" style="display: block; margin: auto;" /> ] .less-right[ Historically, the US government set binding price floors for milk. .green[**Twist:** The government bought the surplus of milk.] ] --- count: false # US Dairy Price Supports .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-20-1.svg" style="display: block; margin: auto;" /> ] .less-right[ Historically, the US government set binding price floors for milk. .green[**Twist:** The government bought the surplus of milk.] ] --- # US Dairy Price Supports .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-21-1.svg" style="display: block; margin: auto;" /> ] .less-right[ Historically, the US government set binding price floors for milk. .green[**Twist:** The government bought the surplus of milk.] .orange[**Consequence:** Additional deadweight loss (*e.g.,* government cheese).] ] --- class: inverse, middle # Price Ceilings --- # Price Ceiling .footnote[.pink[<span>†</span>]: For price ceilings, *binding* .mono[=] set below the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-22-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a binding.super[.pink[<span>†</span>]] price ceiling affect the market price and quantity? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price ceiling </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $3.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[D] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[S] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> P.sub[Market] </td> <td style="text-align:center;line-height: 110%;"> $5.50 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> </tbody> </table> ] --- count: false # Price Ceiling .footnote[.pink[<span>†</span>]: For price ceilings, *binding* .mono[=] set below the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-24-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a binding.super[.pink[<span>†</span>]] price ceiling affect the market price and quantity? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price ceiling </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $3.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[D] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> 7 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[S] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> 2 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> P.sub[Market] </td> <td style="text-align:center;line-height: 110%;"> $5.50 </td> <td style="text-align:center;line-height: 110%;"> $3.00 </td> </tr> </tbody> </table> ] --- # Price Ceiling .footnote[.pink[<span>†</span>]: For price ceilings, *binding* .mono[=] set below the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-26-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a binding.super[.pink[<span>†</span>]] price ceiling affect total surplus in an efficient market? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price ceiling </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $3.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> CS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> PS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> TS </td> <td style="text-align:center;line-height: 110%;"> $20.25 </td> <td style="text-align:center;line-height: 110%;"> \( \qquad \, \ \ \) </td> </tr> <tr> <td style="text-align:left;"> DWL </td> <td style="text-align:center;"> $0.00 </td> <td style="text-align:center;"> </td> </tr> </tbody> </table> ] --- count: false # Price Ceiling .footnote[.pink[<span>†</span>]: For price ceilings, *binding* .mono[=] set below the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-28-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a binding.super[.pink[<span>†</span>]] price ceiling affect total surplus in an efficient market? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price ceiling </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $3.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> CS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> $12.00 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> PS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> $2.00 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> TS </td> <td style="text-align:center;line-height: 110%;"> $20.25 </td> <td style="text-align:center;line-height: 110%;"> $14.00 </td> </tr> <tr> <td style="text-align:left;"> DWL </td> <td style="text-align:center;"> $0.00 </td> <td style="text-align:center;"> $6.25 </td> </tr> </tbody> </table> ] --- # Price Ceiling .footnote[.pink[<span>†</span>]: For price ceilings, *non-binding* .mono[=] set above the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-30-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a non-binding.super[.pink[<span>†</span>]] price ceiling affect the market price and quantity? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price ceiling </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $8.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[D] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[S] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> P.sub[Market] </td> <td style="text-align:center;line-height: 110%;"> $5.50 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> </tbody> </table> ] --- count: false # Price Ceiling .footnote[.pink[<span>†</span>]: For price ceilings, *non-binding* .mono[=] set above the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-32-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a non-binding.super[.pink[<span>†</span>]] price ceiling affect the market price and quantity? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price ceiling </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $8.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[D] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> Q.sub[S] </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> <td style="text-align:center;line-height: 110%;"> 4.5 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> P.sub[Market] </td> <td style="text-align:center;line-height: 110%;"> $5.50 </td> <td style="text-align:center;line-height: 110%;"> $5.50 </td> </tr> </tbody> </table> ] --- # Price Ceiling .footnote[.pink[<span>†</span>]: For price ceilings, *non-binding* .mono[=] set above the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-34-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a non-binding.super[.pink[<span>†</span>]] price ceiling affect total surplus in an efficient market? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price ceiling </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $8.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> CS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> PS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> TS </td> <td style="text-align:center;line-height: 110%;"> $20.25 </td> <td style="text-align:center;line-height: 110%;"> \( \qquad \; \; \; \) </td> </tr> <tr> <td style="text-align:left;"> DWL </td> <td style="text-align:center;"> $0.00 </td> <td style="text-align:center;"> </td> </tr> </tbody> </table> ] --- count: false # Price Ceiling .footnote[.pink[<span>†</span>]: For price ceilings, *non-binding* .mono[=] set above the equilibrium price.] .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-36-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How does a non-binding.super[.pink[<span>†</span>]] price ceiling affect total surplus in an efficient market? <table class="table" style="margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="text-align:left;"> Price ceiling </th> <th style="text-align:center;"> None </th> <th style="text-align:center;"> $8.00 </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;line-height: 110%;"> CS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> PS </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> <td style="text-align:center;line-height: 110%;"> $10.125 </td> </tr> <tr> <td style="text-align:left;line-height: 110%;"> TS </td> <td style="text-align:center;line-height: 110%;"> $20.25 </td> <td style="text-align:center;line-height: 110%;"> $20.25 </td> </tr> <tr> <td style="text-align:left;"> DWL </td> <td style="text-align:center;"> $0.00 </td> <td style="text-align:center;"> $0.00 </td> </tr> </tbody> </table> ] --- # Price Ceiling .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-38-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How can buyers cope with the shortage? ] --- count: false # Price Ceiling .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-39-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How can buyers cope with the shortage? **A.sub[1]:** .pink[Wait.] **A.sub[2]:** .pink[Buy goods on the black market for $8 per unit] <br> .pink[.mono[-->] Only those with relatively high marginal values will pay the black market price.] ] --- count: false # Price Ceiling .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-40-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** How can buyers cope with the shortage? **A.sub[1]:** .pink[Wait.] **A.sub[2]:** .pink[Buy goods on the black market for $8 per unit] <br> .pink[.mono[-->] Only those with relatively high marginal values will pay the black market price.] ] --- # Price-Gouging Laws .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-41-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Objective:** Keep necessities and survival goods affordable during times of crisis. **Policy:** 35 US states have price ceilings that bind only in times of crisis. ] --- count: false # Price-Gouging Laws .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-42-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Objective:** Keep necessities and survival goods affordable during times of crisis. **Policy:** 35 US states have price ceilings that bind only in times of crisis. **Consequence:** Shortage of survival goods during disasters. ] --- class: inverse, middle # Housing --- class: clear-slide **Podcast Question:** According to Jenny Schuetz, which of the following is the main cause of the housing affordability crisis? > **A.** Policy failure. > **B.** Market failure. --- count: false class: clear-slide **Podcast Question:** According to Jenny Schuetz, which of the following is the main cause of the housing affordability crisis? > .pink[**A.** Policy failure.] > **B.** Market failure. --- # A Tale of Two Prosperous Cities .pull-left[ .pink[**San Francisco**] - Median home price (metro): $860,000. ] .pull-right[ .purple[**Houston**] - Median home price (metro): $178,000. ] **Q:** What explains the difference? -- - Climate? Geography? Amenities? Architecture? -- **A:** Many factors contribute, but a growing body of evidence suggests that differences in policy explain a significant part of the difference. - The Bay Area has some of the strictest zoning regulations in the country; Houston literally has none. --- # Zoning Zoning policies restrict the type and intensity of development in certain areas. **Examples** - Minimum and maximum lot sizes. - Height restrictions. - Historical preservation - Urban growth boundaries. - Industrial zones away from residential areas. --- # Zoning **Q:** Why do cities adopt zoning policies? -- **A.sub[1]:** Reduce or prevent disamenities. - Some types of development impose external costs on neighbors. - Suburban sprawl can worsen air quality and increase the cost of providing public services. **A.sub[2]:** Appease neighborhood activists. - Many homeowners desire to "preserve the character" of their neighborhoods. - Development restrictions can increase home prices .mono[-->] wealth transfer to homeowners. --- # Zoning .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-43-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Consequences** 1. Higher prices and less housing. 2. In the absence of externalities, deadweight loss. ] --- # Rent Control .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-44-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Objective:** Make rent more affordable. **Policy:** Price ceiling for rental units. **Consequences** 1. Rental shortage. 2. Deadweight loss. ] --- # Rent Control .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-45-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** Can rent control remedy zoning inefficiencies? ] --- count: false # Rent Control .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-46-1.svg" style="display: block; margin: auto;" /> ] .less-right[ **Q:** Can rent control remedy zoning inefficiencies? **A:** .pink[No. Deadweight loss increases!] ] --- # Rent Control ## Consequences 1. Fewer available rental units. - Less new construction - Landlords convert some existing units to condos. - Current tenants move less frequently. 2. Illegal subletting. - Units rationed based on willingness to pay, not need. - Black market prices exceed both regulated and free market prices. 3. Other unintended consequences. - *e.g.,* quality downgrading. --- # Rent Control ## Consensus Assar Lindbeck, Swedish economist and ardent socialist: > In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing. -- Why such consensus? - Binding rent control policies intend to help impoverished tenants, but do the opposite! .mono[-->] .pink[inefficient] and .pink[poorly targeted]. -- .center[.hi[Impossible to change just one price <br> .mono[==>] <br> Impossible to change just one behavior!]] --- class: clear-slide **Q:** In 2019, the Oregon Legislature passed statewide rent control that limited rent increases to 7% per year. How will this policy affect the availability of rental housing in Portland? > **A.** It will reduce the number of available rental units. > **B.** It will have no effect on the number of available rental units. > **C.** If the unregulated price increases by less than 7%, it will reduce the number of available rental units. > **D.** If the unregulated price increases by more than 7%, it will have no effect on the number of available rental units. > **E.** None of the above. --- count: false class: clear-slide **Q:** In 2019, the Oregon Legislature passed statewide rent control that limited rent increases to 7% per year. How will this policy affect the availability of rental housing in Portland? > **A.** It will reduce the number of available rental units. > **B.** It will have no effect on the number of available rental units. > **C.** If the unregulated price increases by less than 7%, it will reduce the number of available rental units. > **D.** If the unregulated price increases by more than 7%, it will have no effect on the number of available rental units. > .pink[**E.** None of the above.] --- class: clear-slide **Q:** All else being equal, how would a binding rent control policy affect the market for rental housing in the long run?.super[<span>†</span>] > **A.** The rental housing shortage would decrease. > **B.** The rental housing shortage would increase. > **C.** The rental housing shortage would not change. .footnote[.pink[<span>†</span>]: *Long run* .mono[=] period of time that allows consumers and producers to fully adjust their behavior.] --- count: false class: clear-slide **Q:** All else being equal, how would a binding rent control policy affect the market for rental housing in the long run?.super[<span>†</span>] > **A.** The rental housing shortage would decrease. > .pink[**B.** The rental housing shortage would increase.] > **C.** The rental housing shortage would not change. .footnote[.pink[<span>†</span>]: *Long run* .mono[=] period of time that allows consumers and producers to fully adjust their behavior.] --- class: clear-slide **Podcast Question:** Which of the following best describes the likely outcome of a subsidy for renters in relatively affluent metro areas? > **A.** Renters would absorb most of the subsidy and the rent they pay would increase. > **B.** Renters would absorb most of the subsidy and the rent they pay would decrease. > **C.** Landlords would absorb most of the subsidy and the rent they receive would increase. > **D.** Landlords would absorb most of the subsidy and the rent they receive would decrease. --- count: false class: clear-slide **Podcast Question:** Which of the following best describes the likely outcome of a subsidy for renters in relatively affluent metro areas? > **A.** Renters would absorb most of the subsidy and the rent they pay would increase. > **B.** Renters would absorb most of the subsidy and the rent they pay would decrease. > .pink[**C.** Landlords would absorb most of the subsidy and the rent they receive would increase.] > **D.** Landlords would absorb most of the subsidy and the rent they receive would decrease. --- class: inverse, middle # Minimum Wage --- # Minimum Wage **Objective:** Increase the living standards of the working poor. **Policy:** Price floor for wage labor. **Examples** - Federal minimum wage: $7.25 per hour. - As of 2018, Oregon has a tiered minimum wage: - Portland metro counties: $12.50 per hour. - Other urban counties: $11.25 per hour. - Rural counties: $11.00 per hour. - Seattle minimum wage: up to $16.39 per hour. --- # Minimum Wage .more-left[ <img src="08-Policy_Price_Controls_files/figure-html/unnamed-chunk-47-1.svg" style="display: block; margin: auto;" /> ] .less-right[ ## Predictions 1. Unemployment. 2. Workers who keep job better off. 3. Workers who lose job worse off. ] --- # Minimum Wage ## Evidence **Q:** Do binding minimum wages lead to job losses? **A:** No consensus, but employment effects appear small. - Most studies: no effect or small negative effect on employment. - .hi[Seattle:] Small reduction in hours, but not jobs. --- # Minimum Wage ## Evidence **Q:** How do businesses respond to increases in binding minimum wages? **A:** In addition to reducing hours, they often increase prices. - .hi[Seattle:] Self-reported price increases by business owners, observed increase in price of child care, but no observed change in prices or quality of supermarket food. --- # Minimum Wage ## Evidence **Q:** Do binding minimum wages improve the livelihoods of low-skilled workers? **A:** No consensus, but recent evidence suggests...yes? - .hi[Seattle:] Increase in wage either outweighs or offsets reduction in hours .mono[-->] increase or no change in earnings.