FACTS AND TOOLS

1. In rich countries, governments almost always set the fares for taxi rides. The prices for taxi rides are the same in safe neighborhoods and in dangerous neighborhoods. Where is it easier to find a cab? Why? If these taxi price controls were ended, what would probably happen to the price and quantity of cab rides in dangerous neighborhoods?

2. When the United States had price controls on oil and gasoline, some parts of the United States had a lot of heating oil, while other states had long lines. As in the chapter, let’s assume that winter oil demand is higher in New Jersey than in California. If there had been no price controls, what would have happened to the prices of heating oil in New Jersey and in California and how would “greedy businesspeople” have responded to these price differences?

3. On January 31, 1990, the first McDonald’s opened in Moscow, capital of the then Soviet Union. Economists often described the Soviet Union as a “permanent shortage economy,” where the government kept prices permanently low in order to appear “fair.”

“An American journalist on the scene reported the customers seemed most amazed at the ‘simple sight of polite shop workers … in this nation of commercial boorishness.’”

(Source: http://www.history.com/this-day-in-history/first-mcdonalds-opens-in-soviet-union.)

4. Let’s count the value of lost gains from trade in a regulated market. The government decides it wants to make basic bicycles more affordable, so it passes a law requiring that all one-speed bicycles sell for $30, well below the market price. Use the following data to calculate the lost gains from trade, just as in Figure 8.3. Supply and demand are straight lines.

5. During a crisis such as Hurricane Sandy, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come/first-served basis.

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6. A “black market” is a place where people make illegal trades in goods and services. For instance, during the Soviet era, it was common for American tourists to take a few extra pairs of Levi’s jeans when visiting the Soviet Union: They would sell the extra pairs at high prices on the illegal black market.

Consider the following claim: “Price-controlled markets tend to create black markets.” Let’s illustrate with the following figure. If there is a price ceiling in the market for cancer medication of $50 per pill, what is the widest price range within which you can definitely find both a buyer and a seller who would be willing to illegally exchange a pill for money? (There is only one correct answer.)

7. So, knowing what you know now about price controls, are you in favor of setting a $2 per gallon price ceiling on gasoline? Create a pro–price control and an anti–price control answer.

9. In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes).

10. In the late 1990s, the town of Santa Monica, California, made it illegal for banks to charge people ATM fees. As you probably know, it’s almost always free to use your own bank’s ATMs, but there’s usually a fee charged when you use another bank’s ATM. (Source: The war on ATM fees, Time, November 29, 1999.) As soon as Santa Monica passed this law, Bank of America stopped allowing cus tomers from other banks to use their ATMs: In bank jargon, B of A banned “out-of-network” ATM usage.

In fact, this ban lasted for only a few days, after which a judge allowed banks to continue to charge fees while awaiting a full court hearing on the issue. Eventually, the court declared the fee ban illegal under federal law. But let’s imagine the effect of a full ban on out-of-network fees.

11. Consider Figure 8.9. Your classmate looks at that chart and says, “Apartment construction slowed down years before rent control was passed, and after rent control was passed, more apartments were built. Rent control didn’t cut the number of new apartments, it raised it. This proves that rent control works.” What is wrong with this argument?

12. Rent control creates a shortage of housing, which makes it hard to find a place to live. In a price-controlled market, people have to waste a lot of time trying to find these scarce, artificially cheap products. Yet Congressman Charles B. Rangel, the chairman of the powerful House Ways and Means Committee, lived in four rent-stabilized apartments in Harlem. Why are powerful individuals often able to “find” price-controlled goods much more often than the nonpowerful? What does this tell us about the political side effects of price controls? (Source: Republicans question Rangel’s tax break support, The New York Times, November 25, 2008.)

13. In the 1970s, AirCal and Pacific Southwest Airlines flew only within California. As we mentioned, the federal price floors didn’t apply to flights within just one state. A major route for these airlines was flying from San Francisco to Los Angeles, a distance of 350 miles. This is about the same distance as from Chicago, Illinois, to Cleveland, Ohio. Do you think AirCal flights had nicer meals than flights from Chicago to Cleveland? Why or why not?

14. President Jimmy Carter didn’t just deregulate airline prices. He also deregulated much of the trucking industry as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you’re paying money to a trucking company.

15. Suppose you’re doing some history research on shoe production in ancient Rome, during the reign of the famous Emperor Diocletian. Your records tell you how many shoes were produced each year in the Roman Empire, but it doesn’t tell you the price of shoes.

You find a document stating that in the year 301, Emperor Diocletian issued an “edict on prices,” but you don’t know whether he imposed price ceilings or price floors—your Latin is a little rusty. However, you can clearly tell from the documents that the number of shoes actually exchanged in markets fell dramatically, and that both potential shoe sellers and potential shoe buyers were unhappy with the edict. With the information given, can you tell whether Diocletian imposed a ceiling or a floor? If so, which is it? (Yes, there really was an edict of Diocletian, and Wikipedia has excellent coverage of ancient Roman history.)

16. In the market depicted in the figure, there is either a price ceiling or a price floor—surprisingly, it doesn’t matter which one it is: Whether it’s an $80 price floor or a $30 price ceiling, the chart looks the same.

In the chart, there’s a rectangle and a triangle. One represents the value lost from the “deals that don’t get made” and one represents the value lost from “the deals that do get made.” Which is which?

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17. We noted that in the 1970s price floors on airline tickets caused wasteful increases in the quality of airline trips. Does the minimum wage cause wasteful increases in the quality of workers? If so, how? In other words, how are minimum-wage workers like airplane trips?

1. If a government decided to impose price controls on gasoline, what could it do to avoid the time wasted waiting in lines? There is surely more than one solution to this problem.

2. In New York City, some apartments are under strict rent control, while others are not. This is a theme in many novels and movies about New York, including Bonfire of the Vanities and When Harry Met Sally. One predictable side effect of rent control is the creation of a black market. Let’s think about whether it’s a good idea to allow this black market to exist.

3. Let’s measure consumer surplus if the government imposes price controls and goods ended up being randomly allocated among those con sumers willing to pay the controlled price. If the demand and supply curves are as in the figure, then:

4. Antibiotics are often given to people with colds (even though they are not useful for that purpose), but they are also used to treat life-threatening infections. If there was a price control on antibiotics, what do you think would happen to the allocation of antibiotics across these two uses?

5. In a command economy such as the old Soviet Union, there were no prices for almost all goods. Instead, goods were allocated by a “central planner.” Suppose that a good like oil becomes more scarce. What problems would a central planner face in reallocating oil to maximize consumer plus producer surplus?

6. Labor unions are some of the strongest proponents of the minimum wage. Yet in 2008, the median full-time union member earned $886 per week, an average of over $22 per hour (http://www.bls.gov/news.release/union2.nr0.htm). Therefore, a rise in the minimum wage doesn’t directly raise the wage of many union workers. So why do unions support minimum wage laws? Surely, there’s more than one reason why this is so, but let’s see if economic theory can shed some light on the subject.

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!launch! WORK IT OUT

1. What are the equilibrium price and quantity of coats?

2. Suppose the government sets a price ceiling of $80. Will there be a shortage, and if so, how large will it be?

3. Given that the government sets a price ceiling of $80, how much will demanders be willing to pay per unit of the good (i.e., what is the true price)? Suppose that people line up to get this good and that they value their time at $10 an hour. For how long will people wait in line to obtain a coat?