No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Six: Applications in Markets 134 market price. However, unintended consequences may be less maintenance or other services that ordinarily come with renting an apartment. Figure 6.3 illustrates the economic end result of price ceilings. Watch this video to get a more human side of rent control, complete with unintended consequences. Price Ceiling - Rent Control Example from John Stossel MARKET LIMITATIONS In our supply and demand (S&D) analysis above, we were careful to highlight that this process is a tendency towards a steady state —that equilibrium is only in the “now” and is constantly changing. This gives us pause in claiming too much precision for S&D analysis. Many critics of the market think that when it fails to reach some theoretical equilibrium ideal, it needs to be improved (such as with government regulation.) We’ll review those issues in chapter 13, but for now we’ll accept that the market process is the best method of allocating resources in a fallen world. Nonetheless, there are aspects of the real world that limit or impede the market process’s tendency toward equilibrium. Consider Figure 6.4 . Imagine a market for fresh strawberries. I used to live in the central coast of California where strawberries are grown. Flats of strawberries could be purchased very cheaply and were exceedingly good. The prices were significantly cheaper than what I was used to paying, which suggests the market may not work after all— right? Shouldn’t the price be the same everywhere? If there is a difference in price, there is an opportunity for arbitrage (where entrepreneurs can buy cheaply in one market and sell in the expensive market), which tends to drive prices together in all markets, as seen in Figure 6.5 . Figure 6.4, Market Equilibrium Price (P*) and Quantity (Q*) for Fresh Strawberries. Theory suggests there are profit opportunities if the market price diverges from the equilibrium highlighted above. Yet do we see this price action in the real world? P ($) Q (#) Q * D S P * Steady state: a state or process that does not change over time.