A large city in the Eastern US is plagued with higher and higher rents. The aver

Question

A large city in the Eastern US is plagued with higher and higher rents. The average rent in the largest rental neighborhood is $2,000 per month. This neighborhood largely serves new residents to the city, mostly immigrants. Most of these residents cannot afford these rents, so the local government has determined that it will initiate a “price ceiling” or “rent control ceiling” at $1500. In other words, there are to be no rents above $1500 in this neighborhood. Given this information, answer the following questions: a. Explain the likely market effects of this rent control strategy, using illustrative supply and demand curves with the numbers mentioned above. b. Do you anticipate a surplus or shortage of rental housing in this neighborhood? Explain your response. c. Longer term, will landlords be motivated to maintain quality housing in this neighborhood? d. What may happen to the quality of the entire neighborhood over the long term if rent control is maintained for years to come? Explain.

Explanation / Answer

a) The demand for houses will increase and supply will reduce due to low prices.The equilibrium point will not be acheived and marginal benefit for supply will be lower.

b) There will be shortage of house because supply will be lower than the prices were $2000 and demand will be higher than it was the price $1500.

c) Since marginal costs will be higher than marginal benefits landlord will not maintain houses.

d) The quality of neighbourhood will increase as the equilibrium point will be reached. Landlord will have to take risks to avoid further loses when unit price and the quantity hits below the equilibrium point levels.

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