Markets in actionMacroeconomic Foundation Alaleh Mani2011

Turbulent Time House Price after natural disaster Agriculture crisis(drought, flood,…) Illegal activities (drugs, copy write,…) Black Market Labor Wages War for natural resources

Housing Market and Rent ceiling

Dollars of rent

Quantity After earth quack in San Francisco

Demand remain same as before

LRS

Regulated Housing Market Price ceiling = Rent Ceiling=regulation It is effective when force of Market law

and regulation law are in conflict It is effective when RC<Pe

Gray Shade Illegal Region

Search activity and Black Market Search activity=TIME to search someone to

do business with or alternative choice Shortage cause a desire to search activity Black Market is for those buyer and seller

who seek higher price Landlord charge for worthless fitting or Key

Money (extra charge for new key and locks) (schweser 2008 Dec)

Level of black Market == how tightly is price ceiling (schweser 2008 Jun)

Inefficiency DWL and Loss from search activity (CFA

book 2009)Estimation of potential loss from search activity

Not Fair Rules are not fair due to not voluntary

exchange Result are not fair due to DWL and

search Loss Rent ceiling create more shortage History rent ceiling in practice failed In

London after wwII in SF after Earthquake

Labor Market and minimum wage Labor saving technology is the main shock

(telephone operator, low skilled farmer)

Perfectly elastic

Perfectly elastic

Innovation ,Technology

Labor Take skill or OJT(on

job training)

The adjustment time ≈ elasticity of supply (CFA Exam June 2007)

On Job Training occurs while Labor supply is decreasing (CFA Exam June 2008)

Long run Low skilled Market is a competitive Market (Schweser 2009)

easy get in and get out great number of participant.

Minimum Wage effect Price floor=minimum wage=regulation Minimum wage is effective if is in

conflict with market force effective Minimum wage>Pe

Illegal Region

InefficiencyPotential loss

from job search (cfa book 2009)

Human Capital has different behavior Minimum wage cause unemployment?

OR: It encourages productivity? It prevents labors to quit? Firm anticipation on increasing wage

make them fire more? What about increasing population?

(advocating proof)

Living Wage Law a minimum wage 30%(Wage /hour)* ((40)hours/week ))*(4

weeks)=(housing rent/month)

Two type of question:

If house rent =x how much living wage should be

Living wage definition

Sales Tax

Sales Tax

Buyerfull

Less than full

seller fullLess

than full

Social Security

Social Security Tax

employer

full

Less than full

employee full

Less than full

Tax incident

Tax on seller and buyer differences How the tax burden is distributed between buyers

and sellers of a product? Is the distribution of tax burden the same if the tax is

imposed on consumption or production?

D with tax

Buyer payment-seller receive=gov tax income

Size of wedge is important not side of tax

Tax and Elasticity

Tax and efficiencyTax on Van Gogh has

the lowest DWL and

highest tax income

both curves are

inelastic

Subsidies and QuotasHarvest demand supply curve

1. Market supply is perfectly elastic due to momentary supply curve

2. agricultures have inelastic Social demandIndividual Farmer income

decrease

Harvest and Revenue

Government intervention Subsidies Quotas Price Floor (minimum wage)

Subsidies :DWL cause Inefficient use of scarce resources

S-su

bsid

y

DWL

Over Production

Quotas: Upper limit of Quantity to be produced Underproduction inefficient sugar, tobacco, cotton and importstiny little increase in production brings good profit for one producer while more than that vanish it totally

Illegal region

Quantity decrease

Price rises

Cost falls

Market for Illegal goods

Quantity of illegal good

CB

L t

o b

uyer

CB

L t

o s

eller

-CBL

+CBL

Tax on Drugs Since Cost of Break the law should be high Therefore Police need to afford the cost of

enforcing law so what bout Imposing tax :

1.income tax use in education and enforcing law

2.Imposing tax cause a bad feeling of drug advocating