The meaning of price controls and quantity controls, two kinds of government intervention in markets
How price and quantity controls create problems and can make a market inefficient
Why the predictable side effects of intervention in markets often lead economists to be skeptical of its usefulness
Who benefits and who loses from market interventions, and why they are used despite their well-
NEW YORK CITY IS A PLACE where you can find almost anything—
In Chapter 3, we learned the principle that a market moves to equilibrium—
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 supply and demand shows the power and usefulness of supply and demand analysis itself.
The shortages of apartments and taxicabs in New York are two 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 was introduced during World War II to protect the interests of tenants, and it still remains in force. Many other 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.
Similarly, New York’s limited supply of taxis is the result of a licensing system introduced in the 1930s. New York taxi licenses 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 and only a trickle since.
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—