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Market Efficiency and Market Failure. Should the Government Control Apartment Rents?. 1. 2. 3. 4. 5. New York City. After studying this chapter, you should be able to: Understand the concepts of consumer surplus and producer surplus.

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should the government control apartment rents
Should the GovernmentControl Apartment Rents?

1

2

3

4

5

New York City

  • After studying this chapter, you should be able to:

Understand the concepts of consumer surplus and producer surplus.

Understand the concept of economic efficiency, and use a graph to illustrate how economic efficiency is reduced when a market is not in competitive equilibrium.

Use demand and supply graphs to analyze the economic impact of price ceilings and price floors.

Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency.

Analyze government policies to achieve economic efficiency in a market with an externality.

… About one million of New York City’s two million apartments are subject to rent control. The other one million apartments have their rents determined in the market by the demand and supply for apartments.

LEARNING OBJECTIVES

market efficiency and market failure3
Market Efficiency and Market Failure
  • Price ceiling A legally determined maximum price that sellers may charge.
  • Price floor A legally determined minimum price that sellers may receive.
consumer surplus and producer surplus
Consumer Surplus And Producer Surplus

1

LEARNING OBJECTIVE

4 - 1

The Demand Curve is Also the Marginal Benefit Curve

  • Consumer Surplus

Marginal benefitThe additional benefit to a consumer from consuming one more unit of a good or service.

Consumer surplus The difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

consumer surplus and producer surplus5
Consumer Surplus and Producer Surplus

4 - 2

Total Consumer Surplus in theMarket for Chai Tea

  • Consumer Surplus
slide6

4 - 1

  • The Consumer Surplus fromSatellite Television

How much consumer surplus will the owner of this satellite dish receive?

consumer surplus and producer surplus7
Producer Surplus

Producer surplusThe difference between the lowest price a firm would have been willing to accept and the price it actually receives.

Consumer Surplus and Producer Surplus

4 - 3

Producer Surplus

Marginal costThe additional cost to a firm of producing one more unit of a good or service.

consumer surplus and producer surplus8
What Consumer Surplus and Producer Surplus MeasureConsumer Surplus and Producer Surplus

Consumer surplus measures the benefit to consumers from participating in a market, and producer surplus measures the benefit to producers from participating in a market.

the efficiency of competitive markets
The Efficiency of Competitive Markets

2

LEARNING OBJECTIVE

4 - 4

Marginal Benefit Equals Marginal Cost Only at Competitive Equilibrium

  • Marginal Benefit Equals Marginal Cost in Competitive Equilibrium
the efficiency of competitive markets10
The Efficiency of Competitive Markets

4 - 5

Economic Surplus Equals the Sum of Consumer Surplus and Producer Surplus

  • Economic Surplus
the efficiency of competitive markets11
The Efficiency of Competitive Markets

4 - 6

When a Market Is Not in Equilibrium There is a Deadweight Loss

  • Deadweight Loss

Deadweight loss The reduction in economic surplus resulting from a market not being in competitive equilibrium.

the efficiency of competitive markets12
The Efficiency of Competitive Markets
  • Economic Surplus and Economic Efficiency

Economic efficiency A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, and where the sum of consumer surplus and producer surplus is at a maximum.

government intervention in the market price floors and price ceilings
Government Intervention in the Market:Price Floors And Price Ceilings

3

LEARNING OBJECTIVE

4 - 7

The Economic Effect of a Price Floor in the Wheat Market

  • Price Floors: The Example of Agricultural Markets
slide14

4 - 2

  • Price Floors in Labor Markets: The Minimum Wage

Many economists believe there are better policies than the minimum wage for raising the incomes of low-skilled workers.

government intervention in the market price floors and price ceilings15
Government Intervention In The Market:Price Floors And Price Ceilings

4 - 8

The Economic Effect of a Rent Ceiling

  • Price Ceilings: The Example of Rent Controls

Don’t Confuse “Scarcity” with a “Shortage.”

slide16

3

LEARNING OBJECTIVE

4 - 1

  • What’s the Economic Effect of a “Black Market” for Apartments?
government intervention in the market price floors and price ceilings17
Government Intervention In The Market:Price Floors And Price Ceilings
  • The Results of Government Intervention: Winners, Losers, and Inefficiency
  • When the government imposes price floors or price ceilings, three important results occur:
  • Some people win.
  • Some people lose.
  • There is a loss of economic efficiency.

Positive and Normative Analysis of Price Ceilings and Price Floors

Whether rent controls are desirable or undesirable is a normative question. Whether the gains to the winners more than make up for the losses to the losers and for the decline in economic efficiency is a matter of judgment and not strictly an economic question.

externalities and efficiency
Externalities and Efficiency

4

LEARNING OBJECTIVE

Externality A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

The Effect of Externalities

Private costThe cost borne by the producer of a good or service.

Social cost The total cost of producing a good, including both the private cost and any external cost.

Private benefitThe benefit received by the consumer of a good or service.

Social benefit The total benefit from consuming a good, including both the private benefit and any external benefit.

externalities and efficiency19
Externalities and Efficiency

4-9

The Effect of Pollution on Economic Efficiency

HOW A NEGATIVE EXTERNALITY IN PRODUCTION REDUCES ECONOMIC EFFICIENCY

externalities and efficiency20
Externalities and Efficiency

4-10

The Effect of a Positive Externality on Efficiency

HOW A POSITIVE EXTERNALITY IN CONSUMPTION REDUCES ECONOMIC EFFICIENCY

externalities and efficiency21
Externalities and Efficiency

Externalities Can Result in Market Failure

Market failureSituations where the market fails to produce the efficient level of output.

What Causes Externalities?

Property rights The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

government solutions to externalities
Government Solutions to Externalities

5

LEARNING OBJECTIVE

4-11

When There is a Negative Externality, a Tax Can Bring About the Efficient Level of Output

Government Solutions to Externalities

slide23

4-2

5

LEARNING OBJECTIVE

  • Using a Tax to Deal with a Negative Externality
government solutions to externalities24
Government Solutions to Externalities

4-12

When There is a Positive Externality, a Subsidy Can Bring About the Efficient Level of Output

Government Solutions to Externalities

Pigovian taxes and subsidiesGovernment taxes and subsidies intended to bring about an efficient level of output in the presence of externalities.

government solutions to externalities25
Government Solutions to Externalities

Command and Control versus Tradeable Emissions Allowances

Command and control approachGovernment-imposed quantitative limits on the amount of pollution firms are allowed to generate, or government-required installation by firms of specific pollution control devices.

slide26

4-5

  • Can Tradeable Permits Reduce Global Warming?

Rapid growth in China has led to rapid increases in CO2 emissions.