In exercise 18.11 we analyzed the impact of rent control policies that impose a price ceiling in the housing rental market. The stated intent of such policies is often to make housing more affordable. Before answering this question, you may wish to review your answers to exercise 18.11.
A. Begin by illustrating the impact of the rent control price ceiling on the price received by landlords and the eventual equilibrium price paid by renters.
(a)Why is it not an equilibrium for the price ceiling to be the rent actually paid by renters?
(b) If you wanted to implement a tax or subsidy policy that achieves the same outcome as the rent control policy, what policy would you propose?
(c) Could you credibly argue that the alternative policy you proposed in (b)was designed to make housing more affordable?
(d) If you did actually want to make housing more affordable (rather than trying to replicate the impact of rent control policies), would you choose a subsidy or a tax?
(e) Illustrate your proposal from (d)—and show what would happen to the rental price received by landlords and the rents paid by renters. What happens to the number of housing units available for rent under your new policy?
(f) True or False: Policies that make housing more affordable must invariably increase the equilibrium quantity of housing—and rent control policies fail because they reduce the equilibrium quantity of housing while subsidies succeed for the opposite reason.
(g) True or False: Although rental subsidies succeed at the goal of making housing more affordable (while rent control policies fail to do so), we cannot in general say that deadweight loss is greater or less under one policy rather than the other.
B. Suppose, again as in exercise 18.11, that the aggregate monthly demand curve is p = 10000−0.01x while the supply curve is p = 1000+0.002x. For simplicity, suppose again that there are no income effects.
(a) Calculate the equilibrium number of apartments x∗ and the equilibrium monthly rent p∗ in the absence of any price distortions.
(b) In exercise 18.11, you were asked to consider the impact of a $1,500 price ceiling. What housing tax or subsidy would result in the same economic impact?
(c) Suppose that you wanted to use tax/subsidy policies to actually reduce rents to $1,500 — the stated goal of the rent control policy. What policy would you implement?
(d) Consider the policies you derived in (b) and (c). Under which policy is the deadweight loss greater?