MINIMUM WAGE

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					     6.
GOVERNMENT
  POLICIES
   Gasoline Prices 9/11
• Within 24 hours of
  9/11 some gasoline
  stations in the
  Cleveland area
  dramatically
  increased prices.
• Assess this action.
          Supply
       Ceteris Paribus
Input prices
Technology
Expectations
Number of sellers
    Gasoline Prices

$


                          S




p




                      D
         qr                   Quantity
     Gasoline Prices

$              S1


                           S




p1


p




                       D
     q1   q                    Quantity
  Importance of price and market
             forces
Market forces and price perform essential
 allocation role.
Allocating goods and services and scarce
 resources to their highest and best use.
This allocation function is automatic
 involving myriad decisions by producers
 and consumers.
If markets are not permitted to work, how
 is this allocative function performed?
PRICE CEILINGS
RENT CONTROLS
                             January 13, 2004
                             In what has become an annual ritual, tenants of many
                             of New York City's 60,000 rent-controlled apartments
                             berated the state officials responsible for computing
                             their rent increases at a hearing last Tuesday.
                             Tenants were understandably upset — they face
                             7.5 percent rent increases in each of the next two
                             years. But their landlords, whose operating costs
                             increased more than 17 percent this year, did not
                             have much to celebrate either.
                             The hearing provided yet another vivid illustration of
                             how dysfunctional the city's rent regulation system is,
                             and how it worsens the very problems it was created
                             to solve.

Rent regulations, which were established in the post-World War II era, are
intended to preserve neighborhood diversity and stability, and to ensure that
rents do not jump to levels that only the wealthy can afford, forcing lower-
income residents to cheaper areas.
But in practice, such laws do not really serve diversity well; they simply freeze the
status quo, so neighborhoods remain only as diverse as they are now, which isn't
very diverse at all.
An apartment can only be rent-controlled if it is in a building constructed before
1947 and if its current tenant (or his family) has occupied it since 1971. Such an
apartment becomes "decontrolled" only when those tenants leave and no relative
assumes the lease. Likewise, rent increases for rent-stabilized apartments are
limited until the tenant moves out, when the "legal rent" (a fiction that has nothing
to do with market value) can be raised about 17 percent to 20 percent. Tenants in
these apartments have a strong interest in staying put, since they can't take their
rent subsidy with them.
                  PRICE CEILINGS

•Rent controls are an example of price ceilings.


•Price ceilings set a price below the equilibrium rate that
cannot be exceeded, i.e. no property owner can charge a
rental rate greater than the ceiling price.


•Price ceilings are legislated by governments and
represent government intervention in the marketplace.


•Price ceilings are usually established when the outcomes
of the market are considered to be unacceptable—equity
values prevail over market values.


•What are the consequences?
    RENT CONTROLS

$


                    S of rental housing




                    equilibrium in absence of
                    price ceiling.
r




                D for rental housing
       qr                 Quantity
                 $   RENT CONTROLS

                                     S of rental housing




             r

Controlled
Rent         rc



                                 D for rental housing
                         qr
                                        Quantity
                 $                RENT CONTROLS

                                                               S of rental housing




                                                      Quantity demanded
                                                      exceeds quantity supplied
             r

Controlled
Rent         rc



                                                         D for rental housing
                                 qs   qr   qd
                                                                  Quantity
                  Quantity supplied        Quantity demanded
                 $                RENT CONTROLS

                                                               S of rental housing




                                                      Who benefits?

             r                                        Who loses?

Controlled
Rent         rc



                                                         D for rental housing
                                 qs   qr   qd
                                                                  Quantity
                  Quantity supplied        Quantity demanded
         $                 RENT CONTROLS

                                                               S of rental housing




     r
              Savings to
               renters


     rc



                                                           D for rental housing
                           qs          qr       qd
                                                                    Quantity
Quantity supplied                                    Quantity demanded
                                Excess demand
         $                 RENT CONTROLS

                                                                  S of rental housing




                                                     Loss to previous
     r                                               renters.
              Savings to
               renters


     rc



                                                             D for rental housing
                           qs          qr       qd
                                                                        Quantity
Quantity supplied                                     Quantity demanded
                                Excess demand
         $                 RENT CONTROLS

                                                                  S of rental housing




                                                     Loss to previous
     r                                               renters.
              Savings to
               renters
                                                         Unmet
                                                        demand
     rc



                                                             D for rental housing
                           qs          qr       qd
                                                                        Quantity
Quantity supplied                                     Quantity demanded
                                Excess demand
The rent regulation scheme is no more precise in distributing
its costs than it is in bestowing its benefits.

While tenants are protected, landlords have to pay market
rates for all of their expenses, including real estate taxes,
insurance, water and fuel oil, all of which have risen steeply in
recent years.
Real estate taxes rose 18.5 percent this year, and insurance
costs for many owners have jumped 50 percent since 9/11. Yet
rents on stabilized apartments went up this year just 4.5
percent for a one-year lease or 7.5 percent for a two-year lease.
Why should landlords, unlike purveyors of virtually every other
commodity in New York, be prohibited from setting their own
prices?

Moreover, by distorting the relationship between property
income and expenses, rent regulation depresses the returns
on property, which in turn causes landlords to under invest.
 Are rent
 controls
  good
economic
 policy?
Alternatives to Rent Controls
  Is there a better way to achieve
           the same goal?
               Housing Vouchers
A better way to create more affordable housing
and to diversify neighborhoods would be to
replace the current system of rent regulation
with a subsidy system similar to the federal
Section 8 housing program.

Vouchers would be distributed to those who
qualified based on explicit criteria defined by
state and city lawmakers.

The costs would be borne in the same manner
as other government programs — through a
progressive tax system. If preserving affordable
housing is a virtue, then society as a whole
should bear its costs.
               $    RENT SUBSIDIES

                                        S of rental housing




                                 As an alternative to a price ceiling,
                                 what will be the effect of providing
                                 renters with a rent subsidy [r-rs]?
               r
rent subsidy




               rs



                                   D for rental housing
                        qr
                                              Quantity
                    RENT SUBSIDIES
               $


                                       S of rental housing

                                     The rent subsidy is an increase in
                                     income causing demand to increase.
                                     Quantity demanded increases of qs.
                                     Government subsidies =
rent subsidy




               r
                                     Vertical
                                     distance=
               rs                    subsidy




                                             Ds
                                  D
                        qr   qs
                                            Quantity
Subsidies to Suppliers
Subsidies to Apartment Builders/Owners
         [Cost to government]
$


                                     S of rental housing
       equilibrium in absence of
       subsidy.
                                               Ssubsidized




r


rs



                                   D for rental housing
                 qr     qs                   Quantity
          Subsidies to Apartment Builders/Owners
                   [Cost to government]
          $


                                               S of rental housing
                 equilibrium in absence of
                 subsidy.
                                                         Ssubsidized
public
subsidy


          r


          rs



                                             D for rental housing
                           qr     qs                   Quantity
PRICE FLOORS
MINIMUM
 WAGE
               PRICE FLOORS

•The minimum wage is an example of price floor.
•Price floors set a price above the equilibrium rate
that cannot decreased, i.e. no employer can pay a
wage rate less than the ceiling floor.


•Price floors are legislated by governments and
represent government intervention in the
marketplace.


•Price floors are usually established when the
outcomes of the market are considered to be
unacceptable—equity values prevail over market
values.
•What are the consequences?
$


          S of workers




w




        D for workers
    q           Quantity
               At the minimum wage, quantity supplied is greater than
     $         quantity demanded.


                                            s


Minimum
 wage




    we




                                        d
      o   qd                       qs               Quantity
     $         Increase in wages of o-qd workers.




                                                    s


Minimum
 wage




    we




                                             d
      o   qd                         qs                 Quantity
     $          Increase in wages of o-qd workers.


                                          s


Minimum
 wage




    we                                 Wages lost by qd –x workers now
                                       unemployed.




                                      d
      o   qd        x           qs                   Quantity
               unemployment
Behind the rhetoric, the debate over the minimum wage revolves
around the issue of the slope of the demand curve for labor and the
responsiveness of quantity demanded to price [wage increases]


   W                                         W
                              SL                                        SL
  WM                                       WM

                                            W
  W



                                   d
                                    Q                               d
                                                                             Q
                              displacement effects

   If the demand for labor is                    If the demand for labor is
   relatively elastic [gradually                 relatively inelastic [steeply
   sloped], the displacement                     sloped], the displacement
   effect will be relatively large.              effect will be relatively small.
Is there a better
way to achieve the
same objective of
higher minimum
wages?
      PRICE FLOORS
AGRICULTURAL PRICE SUPPORTS
Market for Wheat Without Government Intervention
     $


                                  S of wheat




    pw




                                D for wheat
                    qw                   Quantity
Government sets price floor of Ps by guarantying to
to purchase all wheat not sold on the private market for
that price.
                 $


                                    S of wheat



                 ps
 Price Support




                 pw




                                 D for wheat
                      qw                  Quantity
Take a minute and assess
probable outcomes of
agricultural price supports
for wheat.
What will be quantity demanded? What are the
outcomes for consumers?
                              $


                                                                S of wheat
  higher price to consumers




                              ps




                              pw




                                                              D for wheat
                                   qd                 qw               Quantity
                                   lost private consumption
What will be quantity supplied? What are the
outcomes for wheat farmers?
                              $


                                                               S of wheat
  higher price to consumers




                              ps

                                                                  total revenue of
                                                                  wheat farmers
                              pw




                                                             D for wheat
                                   qd   qw              qs            Quantity
                                        excess supply
                                  $


                                                                   S of wheat
      higher price to consumers




                                  ps




                                  pw



private
consumption

                                                                 D for wheat
                                       qd   qw              qs            Quantity
                                            excess supply
                                         Government expenditures=

                                    $


                                                                        S of wheat
        higher price to consumers




                                    ps

                                                                           government
                                                                           purchases
                                    pw



private
consumption

                                                                      D for wheat
                                           qd     qw             qs            Quantity
                                                 excess supply
     Government expenditures=                                             =tax expenditures
                                    $
                                         Issue: What happens to
                                         government owned surpluses?
                                                                             S of wheat
        higher price to consumers




                                    ps

                                                                                government
                                                                                purchases=tax
                                    pw                                          dollars



private
consumption

                                                                           D for wheat
                                            qd        qw             qs             Quantity
                                                     excess supply
   Contrast this to a policy
of paying farmers not to plant
           acreage.

    SOIL BANK PROGRAM
Market for Wheat Without Government Intervention
     $


                                  S of wheat




    pw




                                D for wheat
                    qw                   Quantity
Paying farmers not to plant decreases supply.
 $
                       S of wheat

                                S of wheat



p1


                               What is cost to taxpayer?

pw




                             D for wheat
        q1      qw                    Quantity
     What is cost to taxpayer?
$
                    S of wheat

                             S of wheat



p1




pw




                          D for wheat
     q1      qw                    Quantity
What subsidy level will be required to bribe farmers
                   not to plant?
   $
                          S of wheat

                                   S of wheat



   p1


                                  Potential cost to taxpayer.

   pw




                                D for wheat
           q1      qw                    Quantity
California Energy
 Deregulation
Before deregulation price is regulated at Pr.

  $


                                 S of energy




 pr




                               D for energy
                  qr                     Quantity
              Deregulation
• To make energy deregulation politically
  palatable to California residents, the price
  of electricity was pegged at the pre-
  existing regulated price.
• Subsequently, the nation and California
  experienced an energy shortage.
• What were the consequences to
  California?
     The supply of energy decreased.

 $
                        S1

                               S of energy




                                What happened to price?


pr




                             D for energy
                qr                     Quantity
           Price is regulated by pre-existing agreement.

              $
                                        S1

                                               S of energy




                                                Price cannot play its
Cost to
taxpayer
                                                allocative role.
             pr
                                                How can existing supply
                                                o-q1 be allocated?




                                             D for energy
              0
                        q1        qr                   Quantity
                      energy shortage
If price can’t ration, what does?
• Rolling blackouts to allocate existing
  supplies.
• Use of moral suasion to encourage
  voluntary conservation of energy?
• What are consumer’s incentives for
  voluntary conservation?
• Water rationing.

				
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