Economics R. Glenn Hubbard, Anthony Patrick O

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Should the Government Control Apartment Rents?
Learning Objectives
4.1 Understand the concepts of consumer surplus and producer surplus.
4.2 Understand the concept of economic efficiency.
4.3 Understand the economic effect of government imposed price ceilings and price floors.
4.4 Analyze the economic impact of taxes.
APPENDIX Use quantitative demand and supply analysis. APPENDIX Use quantitative demand and supply analysis.
New York City has two million apartments, about
one million of which are subject to rent control.
The other one million apartments have their rents
determined in the market by the demand and supply
for apartments.
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Economic Efficiency, Government Price Setting,
and Taxes

• Price ceiling A legally determined maximum
  price that sellers may charge.
• Price floor A legally determined minimum price
  that sellers may receive.

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Consumer Surplus and Producer Surplus
Learning Objective 4.1
4.1

• Consumer Surplus

Consumer surplus The difference between the
highest price a consumer is willing to pay and
the price the consumer actually pays. Marginal
benefit The additional benefit to a consumer
from consuming one more unit of a good or
service.
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Consumer Surplus and Producer Surplus
Learning Objective 4.1

• Consumer Surplus

FIGURE 4-1
Deriving the Demand Curve for Chai Tea
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Consumer Surplus and Producer Surplus
Learning Objective 4.1

• Consumer Surplus

FIGURE 4-2
Measuring Consumer Surplus
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Consumer Surplus and Producer Surplus
Learning Objective 4.1
Consumer Surplus
FIGURE 4-3
Total Consumer Surplus in the Market for Chai Tea
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Learning Objective 4.1

• The Consumer Surplus fromSatellite Television

Consumer surplus allows us to measure the benefit
consumers receive in excess of the price they
paid to purchase a product.
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Consumer Surplus and Producer Surplus
Learning Objective 4.1

• Producer Surplus

Marginal cost The additional cost to a firm of
producing one more unit of a good or service.
Producer surplus The difference between the
lowest price a firm would have been willing to
accept and the price it actually receives.
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Consumer Surplus and Producer Surplus
Learning Objective 4.1

• Producer Surplus

FIGURE 4-4
Calculating Producer Surplus
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Consumer Surplus and Producer Surplus
Learning Objective 4.1

• What Consumer Surplus and Producer Surplus Measure

Consumer surplus measures the net benefit to
consumers from participating in a market rather
than the total benefit. The net benefit equals
the total benefit received by consumers minus the
total amount they must pay to buy the
good. Similarly, producer surplus measures the
net benefit received by producers from
participating in a market, or the total amount
firms receive from consumers minus the cost of
producing the good.
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The Efficiency of Competitive Markets
Learning Objective 4.2
Marginal Benefit Equals Marginal Cost in
Competitive Equilibrium
FIGURE 4-5
Marginal Benefit Equals Marginal CostOnly at
Competitive Equilibrium
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The Efficiency of Competitive Markets
Learning Objective 4.2
Economic Surplus
Economic surplus The sum of consumer surplus and
producer surplus.
FIGURE 4-6
Economic Surplus Equals the Sum of Consumer
Surplus and Producer Surplus
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The Efficiency of Competitive Markets
Learning Objective 4.2
Deadweight Loss
FIGURE 4-7
When a Market Is Not in Equilibrium There is a
Deadweight Loss
Deadweight loss The reduction in economic
surplus resulting from a market not being in
competitive equilibrium.
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The Efficiency of Competitive Markets
Learning Objective 4.2
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 in which the sum of consumer
surplus and producer surplus is at a maximum.
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Government Intervention in the MarketPrice
Floors And Price Ceilings
Learning Objective 4.3
Price Floors Government Policy in Agricultural
Markets
FIGURE 4-8
The Economic Effect of a Price Floor in the Wheat
Market
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Learning Objective 4.3

• Price Floors in Labor Markets The Debate Over
  Minimum Wage Policy

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Government Intervention in the MarketPrice
Floors And Price Ceilings
Learning Objective 4.3
Price Ceilings Government Rent Control Policy
in Housing Markets
FIGURE 4-9
The Economic Effect of a Rent Ceiling
Dont Let This Happen to YOU!Dont Confuse
Scarcity with a Shortage
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Government Intervention in the MarketPrice
Floors And Price Ceilings
Learning Objective 4.3
Black Markets
Black markets A market in which buying and
selling take place at prices that violate
government price regulations.
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Learning Objective 4.3
Whats the Economic Effect of a Black Market
for Apartments?
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Learning Objective 4.3

• Does Holiday Gift Giving Have a Deadweight Loss?

Gift giving may lead to deadweight loss.
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Government Intervention in the MarketPrice
Floors And Price Ceilings
Learning Objective 4.3
The Results of Government Price Controls
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.
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Government Intervention in the MarketPrice
Floors And Price Ceilings
Learning Objective 4.3
Positive and Normative Analysis of Price Ceilings
and Price Floors

• Whether rent controls or federal farm programs
  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.

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The Economic Impact of Taxes
Learning Objective 4.4
The Effect of Taxes on Economic Efficiency
FIGURE 4-10
The Effect of a Tax on the Market for Cigarettes
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The Economic Impact of Taxes
Learning Objective 4.4
Tax Incidence Who Actually Pays a Tax?
Tax incidence The actual division of the burden
of a tax between buyers and sellers in a market.
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The Economic Impact of Taxes
Learning Objective 4.4
Tax Incidence Who Actually Pays a Tax?
Determining Tax Incidence on a Demand and Supply
Graph
FIGURE 4-11
The Incidence of a Tax on Gasoline
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Learning Objective 4.4
When Do Consumers Pay All of a Sales Tax Increase?
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The Economic Impact of Taxes
Learning Objective 4.4
Tax Incidence Who Actually Pays a Tax?
Does It Matter Whether the Tax Is on Buyers or
Sellers?
FIGURE 4-12
The Incidence of a Tax on Gasoline Paid by Buyers
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Learning Objective 4.4

• Is the Burden of the Social Security Tax Really
  Shared Equally between Workers and Firms?

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LOOK
Is Rent Control a Lifeline or Stranglehold?
An Inside
The Landlords Two Sides of a Coin
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Black market Consumer surplus Deadweight
loss Economic efficiency Economic
surplus Marginal benefit
Marginal cost Price ceiling Price floor Producer
surplus Tax incidence
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• Quantitative Demand and Supply Analysis

Demand and Supply Equations
FIGURE 4A-1
Graphing Supply and Demand Equations
QD QS
QD 0 3,000,000 1,000P
and
QS 0 450,000 1,300P
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• Quantitative Demand and Supply Analysis

Calculating Consumer Surplus and Producer Surplus
FIGURE 4A-2
Calculating the Economic Effect of Rent Controls
CONSUMER SURPLUS PRODUCER SURPLUS DEADWEIGHT LOSS
COMPETITIVE EQUILIBRIUM 1,125 865.50 0
RENT CONTROL 1,338.75 278 373.75