IMAGINE YOURSELF IN DOWNTOWN Calgary or Montreal, eager to get a taxi to avoid being late for an important appointment—it is difficult to find an empty cab, especially during peak hours. Or think about the challenges in finding a rental apartment in an urban area—in major Canadian cities, the percentage of apartments that are available to rent is declining. But if you think the conditions are bad in Canada, then you definitely don’t want to try to travel by taxicab or to get a decent, affordable rental apartment in New York City because it is almost impossible to do so. Why does this happen in the Big Apple? You might think that New York’s notorious shortages of cabs and apartments are the inevitable price of big-city living. However, they are largely the product of government policies—specifically, of government policies that have, one way or another, tried to prevail over the market forces of supply and demand.

In Chapter 3, we learned the principle that a market moves to equilibrium—that the market price rises or falls to the level at which the quantity of a good that people are willing to supply is equal to the quantity that other people demand.

But sometimes governments try to defy that principle. Whenever a government tries to dictate either a market price or a market quantity that’s different from the equilibrium price or quantity, the market strikes back in predictable ways. Our ability to predict what will happen when governments try to defy the forces of supply and demand shows the power and usefulness of supply and demand analysis itself.

The shortages of apartments and taxicabs in New York are particular examples that illuminate what happens when the logic of the market is defied. New York’s housing shortage is the result of rent control, a law that prevents landlords from raising rents except when specifically given permission. Rent control in New York was introduced during World War II to protect the interests of tenants, and it still remains in force. Many other North American cities have had rent control at one time or another, but with the notable exceptions of New York and San Francisco, these controls have largely been done away with. In much of Canada rent controls have been eliminated or, in fact, never existed in the first place. Where they still exist, in British Columbia, Manitoba, Ontario, Quebec, and Prince Edward Island, rent controls are significantly weaker than they were several decades ago.

Similarly, New York’s limited supply of taxis is the result of a licensing system introduced in the 1930s. New York taxi licences are known as “medallions,” and only taxis with medallions are allowed to pick up passengers. Although this system was originally intended to protect the interests of both drivers and customers, it has generated a shortage of taxis in the city. The number of medallions remained fixed for nearly 60 years, with no significant increase until 2004.

In this chapter, we begin by examining what happens when governments try to control prices in a competitive market, keeping the price in a market either below its equilibrium level—a price ceiling such as rent control—or above it—a price floor such as the minimum wage paid to workers in many countries. We then turn to schemes such as agricultural quotas and taxi medallions that attempt to dictate the quantity of a good bought and sold.