What are the expected economic outcomes, given the same economic laws above, when government sets rent...

What are the expected economic outcomes, given the same economic laws above, when government sets rent levels (ceilings) below the market equilibrium rate? Why?

Expert Solution

Price ceiling is undertaken by the government in order to keep prices of the goods low so that it is accessible by all. It is generally done for necessity goods/services.

In the case of housing sector, often high rent affects marginalised people, thus government impose price ceiling in order to reduce the prevailing market rent. Herein governnment imposes a maximum price that landlords can ask for while giving rent. This situation creates disequilibrium in the market.

As per the figure given below, E, being the equiblirium point where demand and supply intersect giving the price to be P1 and correspoinding supply to be Q1. When government reduced price to P2( price ceiling) demand now is "b" and supply is "a" at this point. As seen in the figure, it created excess demand.

The economic outcome can be explaied as:

when price ceiling is imposed on rent, it will make rent cheaper , thus enabling poor people to afford to get rent at lower cost. However it will create excess demand in the situation. Also with lower prices, discouraging landlords to rent out their appartments, cause shotage in supply of rent. It will make landloads invest less into rent business. Thus investment will go down.Even though rent is cheap but supply is short, it will affect the fulfilment of demand. As rent is low, quality of rented house provided will also detoriate. Hence it will have both positive and negative consequences.

Rahul Sunny answered 2 years ago

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