Question

QUESTION ONE [20]

Assume the equilibrium price for rental space for residential occupation is R100/m2 and people seeking homes find this equilibrium price too high. Home seekers therefore lobby the government to pass laws that alter the market outcome by changing the price of rental accommodation. If those seeking rental accommodation are successful in their lobbying, the government will impose a legal maximum on the price at which rental accommodation can be sold. In terms of the above, discuss the effect on the equilibrium price and quantity of rental accommodation in each of the following cases, using diagrams to motivate your answer:

1.1 Government imposes a price ceiling of R120/m2 for rental accommodation. (8)

1.2 Government imposes a price ceiling of R70/m2 for rental accommodation

Answer 1

The equilibrium price for rental space for residential occupation is R100/m2 and as people seeking homes find this equilibrium price too high, they can lobby the government to set a legal maximum price or rent which is known as the price ceiling.

1.1. In this case, the demand curve is D and the supply curve is S. Equilibrium rent is R100/m2. Now any price ceiling above the equilibrium price is known as the non-binding price ceiling. In case of a non-binding price ceiling, the equilibrium price and quantity remain unchanged i.e it doesn't affect the equilibrium price and quantity. Hence here as price ceiling at P=R120/m2 is above the equilibrium rent, hence it will not affect the equilibrium rent and equilibrium quantity of apartments as it is a non-binding price ceiling.

1.2. In this case, the price ceiling at P=R70/m2 is below the equilibrium rent, hence it is a binding price ceiling. Hence, after the imposition of this binding price ceiling, the equilibrium price will be R70/m2 and quantity demanded at this price is Q2 and quantity supplied is Q3, as the quantity demanded is greater than the quantity supplied, there exists an excess demand or shortage of apartments given by (Q2-Q3). Also for higher demand, there exists a black market for apartments where consumers are willing to pay as high as P3 which is the black market price.