6. In the past usury laws were common. A usury law establishes a price ceiling for interest rates, and anyone who charges more is guilty of being a loan shark.
a) Use supply and demand to show what will happen in the market if the legal rate is below the equilibrium rate.
b) The case against usury laws usually assumes that people are rational, that is, they have well-defined goals and act to attain those goals as best they can. Why do usury laws look bad when we make this assumption?
c) Some people reject the assumption that people are rational as economists assume. They argue that some people have self-control problems and are compulsive spenders who ignore the long-run consequences of their actions. Even though they may be legally adult, they still cannot act in a responsible, adult manner. Other people are stupid and are easily duped by people who are smarter and more cunning than they are. If you view people in this way, why might usury laws look beneficial?
d) What view do you take?
7. Search the web for "payday loans." You should find sites of companies that make these loans as well as a few sites that are critical of them. How do payday loans work? What is the argument that they are socially useful? What is the argument that they should be curtailed or more tightly regulated?
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