![]() However, the underlying forces that shifted the demand curve to the right are still there. ![]() In Figure 3.21, the horizontal line at the price of $500 shows the legally fixed maximum price set by the rent control law. Suppose that a city government passes a rent control law to keep the price at the original equilibrium of $500 for a typical apartment. In this market, at the new equilibrium E 1, the price of a rental unit would rise to $600 and the equilibrium quantity would increase to 17,000 units. The effect of greater income or a change in tastes is to shift the demand curve for rental housing to the right, as the data in Table 3.7 shows and the shift from D 0 to D 1 on the graph. The original equilibrium (E 0) lies at the intersection of supply curve S 0 and demand curve D 0, corresponding to an equilibrium price of $500 and an equilibrium quantity of 15,000 units of rental housing. Such changes can cause a change in the demand for rental housing, as Figure 3.21 illustrates. Perhaps locally-based businesses expand, bringing higher incomes and more people into the area. Perhaps a change in tastes makes a certain suburb or town a more popular place to live. Everyone needs an affordable place to live. Rent control becomes a politically hot topic when rents begin to rise rapidly. Some of the best examples of rent control occur in urban areas such as New York, Washington D.C., or San Francisco. In some cities, such as Albany, renters have pressed political leaders to pass rent control laws, a price ceiling that usually works by stating that landlords can raise rents by only a certain maximum percentage each year. Consumers, who are also potential voters, sometimes unite behind a political proposal to hold down a certain price. In many markets for goods and services, demanders outnumber suppliers. In this particular case, the government did not impose a price ceiling, but there are other examples of where price ceilings did occur. ![]() ![]() As a result, many people called for price controls on bottled water to prevent the price from rising so high. For example, in 2005 during Hurricane Katrina, the price of bottled water increased above $5 per gallon. A government imposes price ceilings in order to keep the price of some necessary good or service affordable. The next section discusses price floors.Ī price ceiling is a legal maximum price that one pays for some good or service. This section uses the demand and supply framework to analyze price ceilings. A price ceiling keeps a price from rising above a certain level (the “ceiling”), while a price floor keeps a price from falling below a given level (the “floor”). Laws that government enact to regulate prices are called price controls. Alternative policy tools can often achieve the desired goals of price control laws, while avoiding at least some of their costs and tradeoffs. The demand and supply model shows how people and firms will react to the incentives that these laws provide to control prices, in ways that will often lead to undesirable consequences. In some cases, discontent over prices turns into public pressure on politicians, who may then pass legislation to prevent a certain price from climbing “too high” or falling “too low.” This is one of the major conclusions of this section.Ĭontroversy sometimes surrounds the prices and quantities established by demand and supply, especially for products that are considered necessities. Rather, the principles will become apparent in sometimes unexpected ways, which may undermine the intent of the government policy. Governments can pass laws affecting market outcomes, but no law can negate these economic principles. Two of these principles, which we have already introduced, are the laws of demand and supply. In this section, we will explore the outcomes, both anticipated and otherwise, when government does intervene in a market either to prevent the price of some good or service from rising “too high” or to prevent the price of some good or service from falling “too low”.Įconomists believe there are a small number of fundamental principles that explain how economic agents respond in different situations. To this point in the chapter, we have been assuming that markets are free, that is, they operate with no government intervention. Analyze demand and supply as a social adjustment mechanism.Explain price controls, price ceilings, and price floors.By the end of this section, you will be able to:
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