Overview

Barryton is a mid-sized city in a southwestern state that is experiencing significant changes to its economy.

In 2010, the city had a population of 125 thousand people and a median household income of $36000.1

The fraction of households with at least one unemployed adult was 0.28, and the housing cost index was measured at $1425.2 At the same time (beginning approximately 2 years prior), other cities were offering more lucrative commercial rental opportunities, and this led to some large companies relocating their central offices away from Barryton to these favorable cities. The reduced commercial activities had a quick and direct impact on the city's economy as overall growth became stagnant. This change in the economic environment motivated the local government to begin implementing policies geared towards promoting economic growth in the city.

Over the seven-year period from 2010 to 2017, the policies implemented have led to an expansion of the textile industry as well as an increase in new small businesses in the food industry. During that same time period, Barryton experienced an 8 percent increase in its population with the number of households increasing by 5000. These policies, along with the change in population, also led to an increase in household income and housing costs. Specifically, there was a $4,000 increase in the median household income, and a $75 increase in housing costs. In addition, the fraction of households with at least one unemployed adult decreased to 0.25. While the expansion of businesses in Barryton, and the change in unemployed adults were anticipated and favorable direct results, inadequate access to affordable housing became an unexpected indirect result.

In a state level report on the housing access and affordability in 2017, researchers at the Department of Housing estimated that the demand for a 2-bedroom housing unit (2-Beds) for rent is described by the equation: Q = 2020 - 2.5P - 0.05M + 0.8HLDS + 20UE + 1.25HC, where Q is the quantity of 2-Beds for rent per month, P is the monthly price (rent) for a 2-Beds, M is the median household income, HLDS is the change in the number of households, UE is the fraction of households with at least one unemployed adult, and HC is the housing cost index.

Taking a closer look at Barryton, the researchers estimated that the current supply of 2-Beds for rent is described by the equation: Q = 5P - 4600, where Q is the quantity 2-Beds for rent per month, and P is the monthly price (rent) for a 2-Beds. It was further stated in their report that while the market cleared at the current market price, they were able to identify 3125 households desiring to rent a 2-bedroom housing unit, but not being able to afford one at the current market price. As a possible step towards improving housing access and affordability, the report stated that if encouraged, developers in Barryton would provide new 2-Beds for rent, and that this additional supply is described by the equation: Q = 2.5P - 2300. Given the current economic environment and the 2017 report, and with a desire to improve housing access and affordability, the policymakers and economic advisors to Barryton's local government have proposed implementing a policy that focuses on households and aims at increasing their ability to rent a 2-bedroom housing unit. The proposed policy is $600 rent subsidy (price subsidy) to households. At the beginning of 2018, the government implemented policies specifically geared towards developers in Barryton. These developers were encouraged and entered the market with additional 2-Beds for rent.

1. Using the data and equations provided by the 2017 housing access and affordability report, describe

the current market outcome before the government policies (in 2017). This description should include

the current market price (rent), the price tenants pay, the price landlords receive, and the quantity

of housing units rented per month. Also include consumers' surplus, producers' surplus, government

surplus (if any) and the total surplus in the market. Be sure to include a discussion about whether the

market's equilibrium status and level of efficiency. This discussion should inform what factors led to

the conclusion about equilibrium and efficiency and provide appropriate measures (if any) of these.

Also include a brief discussion about whether the current market adequately provides affordable

housing to those desiring to rent a 2-bedroom housing unit. All calculations and graphs should be

documented on a separate page(s), labeled as Appendix 1, and referred to (where appropriate) in

the discussion.