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 pP_E1E₁

Landlords' surplus at market equilibrium = Area of rectangle P_E1E₁OQ_E1

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 P_E1CE₂E₁

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).

Rahul Sunny answered 2 years ago

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