Question

Using economic concepts learned in class, economically evaluate a maximum price policy being implemented in Christchurch on the market for residential rental properties. As part of your answer, explain who wins and who loses from the maximum price policy AND WHY. Also explain whether you think the policy should be implemented or not and why/why not.?

Answer 1

Maximum price policy is the price control policy where the maximum price of price ceiling is fixed that can be charged. In the context of Christchurch, the government has implemented price ceiling as a maximum price policy in the market of rented residential properties. It has caused rented properties to ba available at a price that is within the price ceiling limits. In the short run, property owners cannot decrease the supply, rather they are forced to provide it at price ceiling level. Hence, it has benefited the consumers who got the rental properties at lower rent. Property owners will be the losers as they could get higher price at market equilibrium if maximum price policy is not implemented. In the long run, the property owners can switch to other uses of the property that could fetch them more income. It will create shortage in the market and consumers are now in loss as they do not get it even if they can pay higher price or rent.

Policy should not be implemented, because it can make property owners to go to the black market and make property unavailable for the consumers. Now, consumers will approach black market and pay more price as rent than the market equilibrium rent. Hence, consumers are now in loss as they end up paying more. It hurts more to those consumers who cannot pay higher price as they have poor purchasing power. Now, both of the consumers and producers are in loss due to this government policy. So, this policy should not be implemented that brings more losses than the gains.