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Microeconomic - Essay Example
Adam Smith strongly adheres for a laissez-faire market where the "invisible hand" operates in order to maximize the utility of all the economic actors. In this free, unregulated market, equilibrium prices and exchange quantities are solely determined by the market forces…
Policymakers intervene in the market by establishing market controls. When the government think that the prevailing market price if unfair to buyers and sellers, they enact price controls which involves setting a price ceiling or a price floor. This paper will look at how price ceiling affect market outcomes specifically focusing on the case of rent controls in the short and long run.
A price ceiling is "a legal maximum on the price at which a good can be sold" Supply Demand and Government Policies 4). It should be noted that setting a price ceiling can bring two different outcomes in the economy. The price ceiling becomes not binding if it is set above the equilibrium price. The price ceiling is only binding if it is lower than the equilibrium price. However, this situation brings about shortages because quantity demanded is greater than quantity supplied. It should be noted that a binding price ceiling also leads to non-price rationing in the forms of long lines, black markets, and seller discrimination.
The primary goal of rent control policy is to make housing more affordable to the less fortunate. Thus, the government enacts rent control which establishes the price ceiling that tenants can charge their landlords. However, as will be illustrated below, one economist says that rent control is "the best way to destroy a city other than bombing" (Mankiw 84).
In the short run, both the demand and supply for housing is inelastic. ...