Chapter 6 Summary

Overall, chapter 6 was relatively easy to understand. It was primarily an application of the material from previous chapters to government policy and actual issues in the real world. The first examples are price ceilings and price floors. Price ceilings are a legal maximum price for a good and price floors are a legal minimum price for a good. Price ceilings and floors can either be non-binding or binding, depending on if they are above or below the market price. If they are binding, they change the market price and do not allow it to reach equilibrium. A binding price ceiling will create a shortage, meaning that some method will have to develop to ration the good (as more is demanded than is supplied). Therefore, while the ceiling was intended to help buyers, it actually makes some of them worse off. This idea can be applied to explain why government price controls were partly responsible for the gas lines of the 1970's. Combining this with elasticity can also show that rent control, while perhaps effective in the short run, in the long run leads to a significant shortage of housing. Price floors function similarly to price ceilings, except they create a surplus. Minimum wage is a price floor and the surplus it creates reflects in unemployment. The effect is especially pronounced on low-wage, low-skill workers (because higher-skill workers have higher equilibrium wages and therefore the floor is non-binding). The final policy discussed is taxes which are necessary for governments to raise revenue. Importantly, taxes on buyers and sellers both have the same result: a lower quantity and a higher price to buyers and a lower one to sellers. This tax will fall primarily on the less-elastic side of the market. I have no questions about the material.