For each of the following programs, identify one or more “unintended” consequenc

Question

For each of the following programs, identify one or more “unintended” consequence:

a.Rental Control

b.Minimum wages

c.Medicare (free hospital care to the aged)

d.Improved highways making suburbs more accessible to the city

e.Forced integration of central-city schools

f.Agricultural price supports

g.Lowering the speed limit to 55miles an hour to save on gasoline

h.Providing health insurance to children who currently are underinsured

i.Banning advertising of cigarettes (Hint : Consider the consequences of increased life spans for social security system)

j.National testing standards for school

Explanation / Answer

(a) Rent control is a form of price ceiling when government imposes a maximum rent allowed, imposed below the free market equilibrium rent. At lower rent, quantity of housing demanded rises but quantity of housing supplied falls, leading to a market shortage (excess demand), giving rise to deadweight loss.

(b) Minimum wage is a form of price floor when government imposes a minimum wage payable, imposed above the free market equilibrium wage. At higher wage, quantity of labor demanded falls but quantity of labor supplied rises, leading to a market surplus (excess supply), giving rise to higher unemployment and deadweight loss.

(c) Free hospital care to the aged citizens will lead to higher riskiness in taking care of health issues since the people covered by Medicare knows that the medical bill arising out of their risky lifestyle will be covered by a third party (the insurance company). This gives rise to moral hazard problem.

(d) When suburbs are more accessible to the city, more people go and settle down in suburbs, giving rise to higher demand for housing in suburbs, leading to increase in housing construction, which causes pollution. This is a negative externality which lowers social welfare.

NOTE: As per Chegg Answering Policy, first 4 parts have been answered.

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