Question

1. If the average rent in NYC is $2,500, this is the equilibrium rent with 1 million apartments rented and the government decided rents were too high and implemented a price ceiling of $1,500.
   1. Draw the market for apartments without the price ceiling.
   2. Demonstrate the effect of the price ceiling on the market for apartments in the city.
   3. What were the effects of this policy? Did the government achieve more apartments at a lower price using the policy of price ceiling? Explain who benefited and who were harmed by this policy.
   4. If the goal is to increase the number of apartments and lower the rent, demonstrate and explain what policy alternatives are available?

Answer 1

a) The market without the price ceiling when the equilibrium price is 2500 and Quantity = 1million

b) The above graph shows the market with the price ceiling of 1500

With price ceiling, the QS decreases to suppose 750k and quantity demanded rises to suppose 1.25 million.

c) With the price ceiling, the quantity demanded is greater than the quantity supplied which creates a shortage of QD-QS = 1.25-750k = 500k units in the market.

The government did not achieve in its policy of providing more apartments at a lower price because now the quantity being supplied is 750k only whereas earlier it was 1million.

The tenants who have been living in his apartment before the price ceiling would pay a higher price so he would lose.

Similarly, the landlords would lose as they will be getting low prices from new tenants.

The tenants who would be able to rent the apartments after the price ceiling would win as they will pay a lower price but would possibly be provided a lower quality housing.

d) Instead of a ceiling, the other alternative is subsidy which is provided by the government. A subsidy will ensure that when the demand for housing increases, the output also increases as the producers will get a higher price and the consumers will pay a lower price. The deadweight loss caused by subsidy is also lower and remains the same than the deadweight loss caused by the price ceiling.