Class Summary #37 for 11/30/11

-I found today's class to be extremely interesting. Today, we learned about "The Economics of Price Control" and Prof. Rizzo explained lessons today using the market for rental apartments.

He drew a supply/demand curve depicting a binding price ceiling. Much of today's class centered around price ceilings.

First off, rent as we know it is not rent in economics. In economics, rent refers to income that you get that is completely unearned by you. For example, Rizzo has a student who sends him interesting articles everyday. This would be rent because he is doing nothing to earn this "income" of knowledge. This brings up the question of whether or not he should be taxed.

We learned how we have a price/rent control. Supply curve tells us how we respond to different prices. For example, if the price of an apartment drop, QS drops and Qd increases. How might this happen? Well, for Qs lowering, a supplier could not sell extra spaces in basement he might otherwise have sold. Thus supply elasticity of apartment housing is very flat. The result of all this is that you get a new equilibrium.

-Market Clearing= When there is a surplus. Not market clearing= when there is not a surplus.

-If a price ceiling is binding, you create a shortage of apartments. It is binding because it is set below market price. In this instance, buyers would be frustrated because people who value housing as buyers would not be guaranteed a chance to get it. And the price it is set at ($800 a month) is not high enough whereas you could effectively ration the housing to only those who value it most.

-Non-binding price ceiling wouldn't create shortages because it is above equilibrium and it wouldn't change behavior because those who value it the most would get it and there is a high supply.

Then we learned some very important concepts. Prof. Rizzo taught us about the Outcomes of Binding Price Ceilings:

Outcomes of Binding Price Ceilings

1. Reduced availability and harder to get. There is a shortage created.
2. Lower quality: If you can't raise prices for apartments, there will be a lower quality apartment which can also help to ration people away. Quality decrease= reducing Qd. 
1. If price ceiling is binding, the companies won't have enough money to pay for maintenance so quality will lower.
3. Black markets: apartment broker for example, or extra charges such as a $3,000 key fee. Or also people who rent lease apartment- I own it and rent to someone else. So I make money from the person renting while I pay landlord for rent.
4. Misallocation- those who value the goods most get it (price rationing system). But this doesn't happen with binding price ceilings because anyone willing to pay the ceiling price ($800) has as good a chance to get it as someone who values it much more.
5. Other neighborhoods that are not rent controlled feel the effects of rent control. If Manhattan has rent control, lets say 4,000 people still need apartments since there is a shortage. So, people will search for places in the surrounding areas, which drives up the prices in those other places. This makes it more costly to get apartments where they once were cheaper and one must take into account that those people still will need to commute in to the city for work, and thus, there is a huge cost.
6. Fairness- who is most able to pay for all these other costs? Less apartments available--> hurts the poor. Ok for the rich, but overall this is unfair.
7. Discrimination- Let's say I don't like owners with dogs and I am trying to sell apartments. When there are limited resources and a price ceiling, I can discriminate. If let's say the first person in line to buy is a dog owner and the 2nd is not, I can just sell my apartment to the second person and refuse to sell the first person an apartment. 
1. Now, one might say this is bad. But if you look at it in one aspect, I could claim discrimination does good for society. I may've discriminated against dog owners, but I still did a public service because I made it easier for the dog owner to get a house somewhere else since I did sell the apartment and thus there is one less person in the market looking for an apartment (the non-dog owner).  So, if I don't sell to someone I don't like, I am still doing a social good. 
2. The social good I am doing is done by renting the place out, not necessarily by discriminating. 
3. Interesting fact: we can discriminate as consumers (I won't buy from a dog owner if I don't like dog owners) but we can get in trouble as sellers if we discriminate and can get sued for doing such.
4. In short, rent control/binding price ceilings makes discrimination less costly.
8. Need to go in for office hours for #8, as I missed this one as I went to 11am class and we didn't get there in class.