Question

Suppose that you are the economic adviser to a local government in Central America that has to deal with a politically embarrassing shortage of affordable housing that was caused by rent controls that the government recently imposed. Your first suggestion is to get rid of the rent controls. Explain how and why rent controls (price ceilings) distort markets and what are some of the economic effects of rent controls.

Since the politicians are unwilling to get rid of the rent controls, they offer you a list of suggestions to make housing more affordable: 1. Government provided housing 2. Tax deductions to renters 3. Tax breaks to construction companies who provide affordable housing. Explain the costs and benefits of each and which option would you suggest?

Answer 1

Suppose I am a business consultant to a Central American local government that has a politically embarrassing shortage of affordable housing caused by rental checks recently imposed by the government. First, we propose that the rent controls be removed.

Rental controls – This has distorted the market as market rents have increased considerably and people expect high rent from people to rent their families. The house market in the United States is so large that many people visit in the United States and can not buy the house. They want to rent the house. There is also a high demand for rent house. So many locals explored this opportunity and arranged rental houses to easily earn money. But the government asked to control rents due to the large increase in rents and the government imposed rent limits. This led to low earnings for the owners of the house and avoided low rent rents. This created a problem for renting homes in the United States.

The following are some economic impacts of rental controls

Low availability of affordable rent houses has had a cost effect on house buyers.

Building slowness impacts the economy as low demand for building houses is not an adequate approach to renting people.

As politicians are not prepared to get rid of rent controls, they offer a list of suggestions to improve the affordability of housing:

1. Government has provided housing – The government will have a significant cost impact on this approach and it will be difficult for the government to manage and manage adequately.

2. Tax deductions for renters – This seems to be the right way of doing things, because it makes it easy for people to receive the tax rebate and willing to rent so they can save taxes and live their life easily.

3. Tax breaks for building companies that are supplying affordable accommodation: this doesn't look like a good option as building companies will explore these opportunities without bringing any significant benefits to people.

We 'd like to choose Option 2-Tax deductions for the rental company, because the option looks more convenient, benefits the people and doesn't impact government on costs.