Question

3) Assume that all markets are perfectly competitive and that lump-sum taxation is possible (e.g. costless redistribution of endowments is possible). In this model; is it possible that a policy which restricts prices at which agents may trade (e.g. rent controls, minimum wages) could be a good idea? Explain fully.

Assume that all markets are perfectly competitive and that lump-sum
taxation is possible (e.g. costless redistribution of endowments is possible).

Answer 1

A perfectly competitive market without restriction, produces goods at efficient level and with no any dead weight loss. But, policies such as rent control or minimum wages, will not be a good idea, because it will create shortage in the industry and dead weight loss will also be created. Further, at the firm level,  the firms supply will be inelastic in the short run, so they will be unable to respond in the short run and it can help government achieve its objective in the short run. But, in the long run, government will not be able to deliver the benefits, because firms will adapt and become elastic to the policy and change accordingly. So, these policies can benefit temporarily and in the short run only.