Question

In: Economics

In a graph with a perfectly inelastic supply curve , illustrate the welfare effects of a...

In a graph with a perfectly inelastic supply curve , illustrate the welfare effects of a rent control policy.

Show the landlords', renters', and the total surplus in the free market equilibrium and the respective welfare with rent control in effect.

Show the welfare loss and the welfare redistribution.

Are there renters who could potentially benefit from this policy, but are ultimately excluded?

Solutions

Expert Solution

The given scenario is depicted in the below graph.

Accordingly,

Renters' surplus at market equilibrium = Area of triangle pPE1E1

Landlords' surplus at market equilibrium = Area of rectangle PE1E1OQE1

Total surplus = Renters surplus + landlord's surplus

With fixation of rent ceiling a portion of landlords'surplus is transferred to renters (welfare redistribution) which is given by the area of rectangle PE1CE2E1

The area iangle of trE1E2d shows potential demand which remains unfructified due to inelastic supply (renters who could potentially benefit from this policy, but are ultimately excluded).


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