Question

On game days, homeowners near a college football stadium used to rent parking spaces in their driveways to fans at a market rate of $11 (4,000 spaces available)

Upon hearing rumors that homeowners were unfairly increasing parking prices for certain "high demand" games, the local town council issued a new town ordinance setting the maximum parking fee at $7.

1. How will homeowners react?
2. How will football fans react?
3. What is the outcome of their actions?

Answer 1

Since it is given that the equilibrium market rate of renting parking space is $11 and the equilibrium quantity (or parking spaces so rented) is 4000 parking spaces, imposing a maximum fee of $7 by the local town council has necessarily interfered with the working of the invisible hand and created an excess demand of parking spaces as against the supply of parking spaces by the homeowners. That means less than 4000 parking spaces will be supplied or rented by homeowners in that town at the rate $7 per parking space. This can be illustrated by the diagram below-

In the above figure, the rate of parking is given on the y or vertical axis and the quantity of parking spaces in given at the x or horizontal axis. Now the demand for parking spaces curve as well as the supply for parking spaces are drawn. The two curves intersect at E denoting that the equilibrium quantity and price is 4000 parking spaces and $11 respectively. But after imposing a rate of $7 by the local town council per parking spaces, the local town council necessary intervene in the working of the invisible hand by creating a price ceiling at $7, give by the horizontal dotted line at $7. At this rate, the quantity demanded of the parking spaces is OC but the supply of parking spaces by homeowners is only OD and OC > OD (i.e. OC - OD = CD). Thus there is a mismatch between the supply and demand and there exists an excess demand over the supply of parking spaces.