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Chapter 4: Q1. (page 175)

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.

  1. Some homeowners now think it’s not worth the hassle to rent out spaces.
  2. Some fans who used to carpool to the game now drive alone.
  3. 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.

d. Some fans now arrive several hours early to find parking.

e. 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.

f. Some homeowners rent spaces for more than $7 but pretend that the buyers are nonpaying friends or family.

Short Answer

Expert verified
  1. The supply of parking space is reduced.
  2. The demand for parking space is increased.
  3. There exists a shortage of parking space.
  4. There will be a waste of resources.
  5. There will be inefficiency in the allocation of resources.
  6. There will be a black market.

Step by step solution

01

Explanation for part (a)

The rent for parking space is fixed at $7, which is below the equilibrium price. Thus, many homeowners who were open to providing parking space before now do not wish to provide space for parking as theprice received does not give much incentive. Thus, the supply of parking space falls from 4,000 to 3,600.

02

Explanation for part (b)

The rent for parking space is reduced from $11 to $7; thus, the demand for parking space will increase, i.e., some people will take their car instead of carpooling. Hence, the demand for parking space rises from 4,000 to 4,400.

03

Explanation for part (c)

Due to decreased price for parking, the demand exceeds the supply, and hencea shortage exists in the market, i.e., a shortage of 800 parking spaces (=4,400 – 3,600).

04

Explanation for part (d)

Some fans arrive early to find parking spaces as the supply of parking spaces does not match the demand for parking spaces. Here, the resources are wasted as the fans have to arrive early to get the space for parking, because the time they waste in search for parking can be used for some other productive purpose.

05

Explanation for part (e)

Some serious fans have given up, and some not-so-big fans are getting space for parking, which illustrates the inefficiency in the allocation of resources. Here, resources are given to those who attach less value to the good than those who cannot consume the good, despite attaching a higher value to it.

06

Explanation for part (f)

Some homeowners charge more than $7, and pretend that the fans are their family or friend is a situation of a black market. The black market represents the market where the government rules are not followed, and an illegal market is formed. Thus, the price ceiling leads to a black market in this case.

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