Chapter 6

Chapter 6 deals with intervention in a competitive market. The chapter introduces new concepts on how the market does not achieve an ideal outcome. In chapter six, this is explained through price ceiling, floors, and taxes. In all three cases, the market does not reach an efficient equilibrium. A price floor is a minimum price for a good. For example, minimum wage is the most popular example of a price floor. With minimum wage, the price is set above equilibrium, therefore the market cannot reach below the minimum wage, or floor, and does not reach equilibrium. The same concept applies with a price ceiling. A price ceiling is put in place to prevent firms from charging the good at a price too high. In the textbook, the example used was the idea of rent control. Rent control puts a maximum on the price landlords can charge. However, the market also becomes inefficient as it can not reach above the ceiling to achieve equilibrium. Eventually, it becomes a bad idea since landlords will not be able to maintain their property and may leave the market. Finally, the last intervention is a tax. With a tax, either the supply side or demand side has a curve shifted left. When this happens, the tax forces the buyers to pay a higher price, and the sellers to receive a smaller amount, therefore it is inefficient.