Question

1) Explain why rent control is an example of a price ceiling.

2) Explain why price ceilings can lead to shortages in terms of supply and demand.

3) Explain the concept of consumer surplus and producer surplus. What effect does rent control have on consumer surplus and producer surplus?

4) Are you an opponent or proponent of rent control? Provide reasons for your stance.

Answer 1

1. Rent control stipulates the maximum rent that can be charged by the owner, just like a price ceiling.

2. Rent control can lead to housing shortages because the owner has no incentive to let out houses because the maximum rent has been fixed. The owner will rent out the premises for other profitable businesses instead of housing. New construction for housing will be halted. Existing housing will also fall into disrepair.

3.

Consumer surplus is the area below demand curve and above market price. It is the difference between what consumers are willing to pay and what they actually pay. The consumer surplus will increase as the rent is lowered.

Producer surplus is the area above supply curve and below market price. It is the difference between what producers get and what is the minimum price at which they are willing to sell. Producer surplus will decrease as the maximum rent is reduced.

4. I am an opponent of rent control. Rent control reduces the incentives for renting out houses and houses fall into neglect. Due to excess demand for housing, discrimination in allotting houses may occur.

There are other alternatives to rent control like giving financial assistance to the needy, building low-cost housing to enable the poor to become house owners eventually.