In the first few weeks of our course, we learned that it is not unusual for governments to make direct interventions in markets with the intent of controlling prices. Consider the rental housing market, a frequent target of government price controls.

• Draw a graph that shows supply and demand for rental housing in some community.
• When drawing this graph, please assume that the demand curve is downward sloping and supply curve is upward sloping.
• Clearly show the original market equilibrium prior to any government intervention.
• Please remember to clearly label your axes, with P on the vertical axis and Q on the horizontal axis.
• Label the supply curve as S₀; demand curve as D₀; the equilibrium price as P₀; and equilibrium quantity as Q₀.
• The local government body is extremely concerned about lack of affordable housing in the community, especially in rental housing. To counter this problem, the government decides to put a binding price ceiling, P₁, on this market. Graphically depict such a binding price ceiling.Graphically indicate the quantity demanded by renters (Q_R) and the quantity supplied by landlords (Q_L) at the price ceiling; and indicate what the distance between these two quantities represents.

Refer to the scenario above to answer these narrative questions.

(a) Will more or fewer apartments be rented once the price ceiling has been imposed? Why?

(b) Is this a successful way to attack the lack of affordable housing? Please explain your response.

(c) Who will benefit and who may be hurt by this price ceiling in the short run and in the long run? Please explain your response.