Question 4.3
1. On game days, homeowners near Middletown University’s stadium used to rent parking spaces in their driveways to fans at a going rate of $11. A new town ordinance now sets a maximum parking fee of $7. Use the accompanying supply and demand diagram to explain how each of the following corresponds to a price-ceiling concept.
Some homeowners now think it’s not worth the hassle to rent out spaces.
Fewer homeowners are willing to rent out their driveways because the price ceiling has reduced the payment they receive. This is an example of a fall in price leading to a fall in the quantity supplied. It is shown in the accompanying diagram by the movement from point E to point A along the supply curve, a reduction in quantity of 400 parking spaces.
Some fans who used to carpool to the game now drive alone.
The quantity demanded increases by 400 spaces as the price decreases. At a lower price, more fans are willing to drive and rent a parking space. It is shown in the diagram by the movement from point E to point B along the demand curve.
Some fans can’t find parking and leave without seeing the game.
Explain how each of the following adverse effects arises from the price ceiling.
Under a price ceiling, the quantity demanded exceeds the quantity supplied; as a result, shortages arise. In this case, there will be a shortage of 800 parking spaces. It is shown by the horizontal distance between points A and B.
117
Some fans now arrive several hours early to find parking.
Price ceilings result in wasted resources. The additional time fans spend to guarantee a parking space is wasted time.
Friends of homeowners near the stadium regularly attend games, even if they aren’t big fans. But some serious fans have given up because of the parking situation.
Price ceilings lead to inefficient allocation of a good—here, the parking spaces—to consumers.
Some homeowners rent spaces for more than $7 but pretend that the buyers are nonpaying friends or family.
Price ceilings lead to black markets.