Krugman_SolMan_CH04 - Samuel Bloore Prof Ravi Bhandari Microeconomics 003-08 McConnell Brue Flynn Microec

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Solution The Market Strikes Back 1. Suppose it is decided that rent control in New York City will be abolished and that market rents will now prevail. Assume that all rental units are identical and are therefore offered at the same rent. To address the plight of residents who may be unable to pay the market rent, an income supplement will be paid to all low- income households equal to the difference between the old controlled rent and the new market rent. a. Use a diagram to show the effect on the rental market of the elimination of rent control. What will happen to the quality and quantity of rental housing supplied? b. Now use a second diagram to show the additional effect of the income-supplement policy on the market. What effect does it have on the market rent and quantity of rental housing supplied in comparison to your answers to part a? c. Are tenants better or worse off as a result of these policies? Are landlords better or worse off? d. From a political standpoint, why do you think cities have been more likely to resort to rent control rather than a policy of income supplements to help low-income people pay for housing? 1. a. With a price ceiling at P CEILING , the quantity bought and sold is Q CEILING , indi- cated by point A. The ceiling at P CEILING is eliminated and the rent returns to the market equilibrium E 1 , with an equilibrium rent of P 1 . The quantity supplied in- creases from Q CEILING to the equilibrium quantity Q 1 . At the same time, you should expect the quality of rental housing to improve. As you learned in this chap- ter, one of the inef±ciencies caused by price ceilings is inef±ciently low quality. As the rent returns to the equilibrium rent, landlords again have the incentive to in- vest in the quality of their apartments in order to attract renters. Q 1 P 1 P CEILING D 1 S A Q CEILING Quantity of apartments E 1 Monthly rent Price ceiling 55 chapter 4 KrugmanMacro_SM_Ch04.qxp 10/19/05 3:46 PM Page 55
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
b. The income-supplement policy causes a rightward shift of the demand curve from D 1 to D 2 . This results in an increase in the equilibrium rent, from P 1 to P 2 , and an increase in the equilibrium quantity, from Q 1 to Q 2 , as the equilibrium changes from E 1 to E 2 . c. Landlords are clearly better off as a result of these two policies: more landlords rent out apartments, and at a higher monthly rent. It is not clear whether tenants are better or worse off. Some tenants who previously could not get apartments can now do so, but at a higher rent. In particular, those tenants who do not receive the income supplement and who used to rent cheap apartments under the price ceiling are now worse off. d. It is likely that tenants who currently live in rent-controlled housing are better or- ganized than tenants who cannot currently Fnd rental housing. And more organ- ized groups can generally exert greater in±uence over city policy.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/30/2008 for the course ECON 2106 taught by Professor Minjaesong during the Spring '06 term at Georgia Institute of Technology.

Page1 / 16

Krugman_SolMan_CH04 - Samuel Bloore Prof Ravi Bhandari Microeconomics 003-08 McConnell Brue Flynn Microec

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online