One key in a \"housing bubble\" is that thesupply of housing must be relatively

Question

     One key in a "housing bubble" is that thesupply of housing must be relatively inelastic when prices arerising. That is, if the quantity supplied increases rapidlywhenever house prices rise, price increases will remain small. Manyhave suggested government policies to increase the elasticity ofsupply. What specific policies might hold prices down whendemand increases, explain.

    -- I'm wondering if land-use regulations orpolicies may effect this?   Also, could subsidizinghousing help? Any help would be appreciated! Thanks!

Explanation / Answer

You're being asked to find a way to increase the housing supply inperiods of high demand. There are several ways to do so. Subsidizing house priceswould not help lower the price - it means the buyer paysless, but the seller still gets the full price. Thegovernment/taxpayers end up paying the difference. In fact,since the buyer is paying less, that makes it MORE likely you willhave housing shortage. Subsidizing building of houses would work, although that takestime, so it isn't a short-term solution. By subsidizingbuilders, their costs are effectively lowered, which means theirsupply curve shifts to the right. This will increase thesupply and, if the demand curve has likewise shifted to the rightbecause of some heightened demand (at all prices), then you end upwith equilibrium at roughly the same price but a higher supply. Another alternative is to give a tax rebate or lower the capitalgains tax on the sale of homes. This might induce more peopleto sell their homes who wouldn't necessarily have considered itbefore - they get to keep more of the sale price, which may meantheir asking price will be lower, and also that there would be alarger supply of houses in the market. Another alternative isa "cash for clunkers" type program, which would pay sellers to selltheir houses. Economically it ends up with the same result asthe tax rebate. Not sure what you mean by "land-use regulations."   Ifyou otherwise had some requirement that would induce people tosell, would there be any guarantee someone would then be eligibleto buy? For example, you could have a land-use requirementthat no one could own more than one home. No one could buy ahome unless they were also selling a home (or were a first-timehomebuyer). This would be a one-shot solution in the shortterm, but in all likelihood wouldn't really solve theproblem. In fact, it could lead to an oversupply of houses,and a DECREASE in prices to compensate. Since your goal is toincrease the elasticity of supply, this option would only increasethe supply, but would not affect its elasticity. Finally, ifthe population of the country were increasing, this wouldn't helpover the long run (by itself). Hope this discussion helps.

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.