17 What is the purpose of price ceilings on rent? So needy people will pay lower rent than the equilibrium rent
18 Why may rent controls be counterproductive? Shortages Illegal markets Less maintenance Discrimination
19 What are other examples of price ceilings? Wage and price controls Usury laws
20 What is a price floor? A legally established minimum price a seller can be paid
21 WmWm WeWe QDQD QEQE QSQS D S A Minimum Wage Results in a Surplus of Labor Unemployment Minimum wage
22 Minimum wage Unemployment
23 What are examples of price floors? Minimum wage law Agricultural price supports
24 Why do we have price ceilings and floors? Because of failures in the free market
25 What is market failure? A situation in which the price system creates a problem for society or fails to achieve societys goals
26 Who was Adam Smith? The father of modern economics who wrote The Wealth of Nations, published in 1776
27 What did Adam Smith say about competition? There must be competition for markets to function properly
28 What happens when competition is lacking? Market failure results
29 $2000 $ Rigging the Personal Computer Market D $1500 S1S1 S2S2 $ $ Inefficient equilibrium Efficient equilibrium
30 What is an example of another market failure? Externalities
31 What is an externality? A cost or benefit imposed on people other than the consumers and producers of a good or service
32 What is a negative externality? An externality that is detrimental to third parties
33 What is an example of a negative externality? Pollution
34 P2P2 Q1Q1 External Cost of Pollution P1P1 S1S1 S2S2 Q2Q2 Includes external costs of pollution Excludes external costs of pollution D
35 What is a positive externality? An externality that is beneficial to third parties
36 What is an example of a positive externality? Vaccinations
37 $10 Q1Q1 Q2Q2 D1D1 S External Benefits of AIDS Vaccinations D2D2 P1P1 Excludes Vaccination benefits Includes Vaccination benefits P2P2
38 External costs Inefficient equilibrium
39 External benefits Inefficient equilibrium
40 What is another example of a positive externality? Public goods
41 What is a public good? A good that, once produced, has two properties: (1) users collectively consume benefits (2) no one can be excluded
42 What are examples of public goods? National defense Public education Roads
43 What is another example of market failure? Income inequality
44 Key Concepts
45 Key Concepts What can cause a shift in a demand curve? What can cause a shift in a supply curve? What are the two types of price controls? What is a price ceiling? What is a price floor? Why do we have price ceilings and floors? What is market failure?
46 Key Concepts cont. What happens when competition is lacking? What is an externality? What is a negative externality? What is a positive externality? What is a public good? What is another example of market failure?
48 Price ceilings and price floors are maximum and minimum prices enacted by law, rather than allowing the forces of supply and demand to determine prices. A price ceiling is a maximum price mandated by government, and a price floor is a minimum legal price.
49 $800 $600 $400 $ D S If a price ceiling is set below the equilibrium price, a shortage will persist ShortageRent ceiling P Q
50 WmWm WeWe QDQD QEQE QSQS D S If a price floor is set above the equilibrium price, a surplus will persist Unemployment Minimum wage
51 Market failure means that the market mechanism does not achieve desirable results. Sources of market failure include lack of competition, externalities, public goods, and income inequality. Although controversial, government intervention is a possible way to correct market failure.
52 An externality is a cost or benefit of a good imposed on people who are not buyers or sellers of that good. Pollution is an example of an external cost, which means too many resources are used to produce the product responsible for the pollution. Two basic approaches to solve this market failure are taxes (like in pollution taxes) and regulation (like in vaccinations).
53 P2P2 Q1Q1 External Cost of Pollution P1P1 S1S1 S2S2 Q2Q2 Includes external costs of pollution Excludes external costs of pollution D
54 Q1Q1 Q2Q2 D1D1 S External Benefits of AIDS Vaccinations D2D2 P1P1 Excludes Vaccination benefits Includes Vaccination benefits P2P2
55 Public goods are goods that are consumed by everyone regardless of whether they pay or not. National defense, air traffic control, and other public goods can benefit many individuals simultaneously and are provided by the government.