ECO 1
PRICE CEILINGS AND FLOORS – DEADWEIGHT
LOSS
Erkmen Giray ASLIM (erkmengirayaslim.com)
e-mail: era314@Lehigh.edu
09/04/2015
Department of Economics
Lehigh University
ATTENDANCE QUESTION
Write your name, date, and section number.
• What is my first name?
• Does rent control makes it easier for you to find an affordable
apartment?
DISCUSSION
• Should the government control apartment rents?
• NewYork, San Francisco, LA and nearly 200 smaller cities
• New York has 2 million apartments – 1 million subject to rent controls.
Others? (Market)
• Prices are much lower in rent controlled apartments. Who benefits?
• Consumer vs. Landlord – Low income vs. High income
• We will see that a price ceiling or a price floor reduces the economic
surplus.
• Some people win, some lose, and there is a loss in economic efficiency.
CONSUMER SURPLUS
Total Consumer Surplus in
the Market for Chai Tea
The difference
between the
highest price and
what is actually
paid!
What is the marginal benefit? (Additional Benefit)
PRODUCER SURPLUS
Measuring Producer Surplus
The difference
between the lowest
price and what is
actually received!
What is the marginal cost? (Additional Cost)
ECONOMIC SURPLUS
The benefit to society
DEADWEIGHT LOSS
Reduction in ES:
Market is not in
competitive
equilibrium. This
amount is not
produced!
When we have a competitive equilibrium, then we can define economic
efficiency (MC=MB and CS + PS is at maximum).
PRICE FLOORS
PRICE FLOORS
Wage increases for low-skilled workers. But what happens to job opportunities?
Positive or normative analysis?
What is the
minimum wage
in the US?
PRICE CEILINGS