Chapter 7 — Exercises
Section A — Price ceilings
A1. Sketch a supply-and-demand diagram for the market for 1-bedroom apartments in Millbrook. Mark the equilibrium at $1,400. Now draw a price ceiling at $1,250 and identify the shortage. Label the quantity supplied at the ceiling, the quantity demanded at the ceiling, and the gap.
A2. Suppose the Walden County Council passes the rent control ordinance described in §7.1. Predict (a) the immediate effect on rents and quantity, (b) the effect over 5 years as new construction slows and some landlords exit, (c) the effect on quality of existing units, and (d) who specifically benefits and who specifically loses.
A3. Diamond, McQuade, and Qian's 2019 study found that rent control in San Francisco reduced the supply of rental housing by about 15% over time. Use the supply-and-demand framework to explain how a price control could reduce supply rather than just hold it constant.
A4. Strict rent control (1970s New York) had worse empirical effects than rent stabilization (modern systems with allowed increases). Why might a less aggressive control produce smaller negative consequences?
A5. Sketch a supply-and-demand diagram with a price ceiling that does not bind (i.e., the ceiling is above the equilibrium price). What happens to the market?
Section B — Price floors
B1. Sketch a supply-and-demand diagram for the labor market with the equilibrium wage at $13/hour. Now draw a minimum wage at $15/hour and identify the unemployment caused by the price floor.
B2. The CBO estimated in 2021 that a $15 federal minimum wage would cause employment to fall by 1.3 to 3.7 million workers while raising wages for 27 million. Implied elasticity is small. Use the supply-and-demand model to interpret these numbers.
B3. Card and Krueger (1994) found no significant negative employment effect from a New Jersey minimum wage increase. List four possible explanations for why the empirical effect was smaller than the standard model predicted.
B4. Why might the labor demand elasticity be larger for very high minimum wage increases (say, $20+) than for *moderate* ones (say, $12)? What does this imply for policy?
B5. The earned income tax credit (EITC) is a wage subsidy paid by the government to low-wage workers. It raises take-home pay without imposing a price floor on wages. Compare its expected employment effects to those of a minimum wage. Which would you expect to cause more or less employment loss?
Section C — Tax incidence
C1. A $2/pack tax is imposed on cigarettes. Demand is highly inelastic. Predict approximately how much of the $2 will be paid by buyers vs. sellers.
C2. A 10% tax is imposed on luxury yachts. Demand is highly elastic; supply is inelastic. Predict who bears the burden. What does this resemble in U.S. tax history?
C3. A government wants to raise revenue without harming consumers too much. Should it tax goods with elastic or inelastic demand? Explain.
C4. Explain why the legal incidence of a tax (who writes the check) is usually different from the economic incidence (who actually pays).
Section D — Subsidies
D1. A $1,000/year tuition subsidy is given to students at private universities. Supply of seats at private universities is inelastic in the short run. Predict approximately who captures the subsidy: students (in the form of lower net tuition) or universities (in the form of higher posted tuition).
D2. A $500/month rent voucher is given to low-income renters in a city with very inelastic housing supply (zoning restrictions). Predict approximately who captures the voucher: renters (lower net rent) or landlords (higher gross rent).
D3. A $2/bushel subsidy is given to wheat farmers. Supply is fairly elastic in the long run; demand is inelastic. Predict approximately who captures the subsidy.
D4. The Bennett hypothesis claims that federal student loan subsidies have been partly captured by colleges. Explain the mechanism using the elasticity framework.
Section E — Deadweight loss
E1. Sketch a supply-and-demand diagram with a tax that creates a wedge between the buyer's price and the seller's price. Identify the deadweight loss triangle.
E2. Why is deadweight loss larger when demand or supply is more elastic?
E3. A carbon tax has substantial deadweight loss in the carbon-emitting industry but produces benefits (reduced emissions). Why might this still be a good policy despite the deadweight loss?
E4. A lump-sum tax on the poor has zero deadweight loss in the technical sense but is regressive and considered unjust. Why does the absence of deadweight loss not make this a good policy?
Section F — Policy debate
F1. "Rent control just punishes landlords." Use both the standard economic critique and the considerations supporting voter support for rent control to evaluate this claim. Where does it have force? Where does it miss something?
F2. "Minimum wage hurts low-wage workers." Articulate this position carefully, citing the simple model. Then articulate the empirical case against it (Card-Krueger and successors). Which version do you find more persuasive, and why?
F3. "Taxes should be progressive — they should fall more heavily on the wealthy." Use the elasticity-of-incidence framework to evaluate which kinds of taxes are best for achieving this goal. Why do some attempts to "tax the rich" (like the 1991 luxury tax) fail to do so?
F4. Suppose the federal government imposed a $20/month tax on all wireless phone plans, with the stated goal of "raising revenue from the telecom industry." Where do you predict the burden would actually fall? Justify with elasticity reasoning.
Section G — Data lookup
G1. Find data on rents in a U.S. city that has rent control (San Francisco, New York, Los Angeles, or another). Compare to a city without rent control of similar size and demographics. What do you observe? What does the comparison suggest about the long-run effects of rent control?
G2. Look up the Seattle minimum wage timeline. The city raised its minimum wage gradually starting in 2014. Find data on the change in low-wage employment in Seattle since then. What do you observe? Compare to the predictions of the simple supply-and-demand model.
G3. Find data on the federal minimum wage in real (inflation-adjusted) terms over the last 50 years. When was its peak? When was its trough? What does the long-run pattern look like?
Section H — Reflection
- After this chapter, has your view of rent control changed? Of the minimum wage? Why or why not?
- The chapter argues that voters who support rent control are responding to "real features of the rental market that the standard model understates." What specific features do you find most compelling?
- "Economic analysis tells you the trade-offs but not the answer." Do you find this framing satisfying or frustrating? Why?
Selected answers in appendices/answers-to-selected.md.