ECON103_A3_Spring09_Answers - ECON 103 Spring 2009 Simon...

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ECON 103, Spring 2009 Simon Fraser University Assignment 3 Answer Key Question 1. (4 marks) Compare the impact of rent control when the supply of housing is fixed and when supply curve is upward sloping. The purpose of this exercise was to help you understand the idea behind government interven- tion into competitive markets and see under what circumstances it will cause DWL. We have discussed that competitive equilibrium is efficient in the sense that in competitive equilibrium gains from trade are maximized. Recall that both consumer and producer surplus depend on price at which the good is sold: the higher is the price the larger is producer surplus, the lower is the price the higher is consumer surplus. Government can use price controls and quotas to redistribute the gains from trade (surpluses) between the sides of the market by affecting the market price. Price floors and quotas are policies that are aimed at keeping market price high (above equilibrium) and these benefit producers. Rent control is an example of a price ceiling, which is a policy aimed at keeping the market price below the equilibrium level, obviously the objective is to benefit consumers. In the case with fixed supply the quantity of housing that is actually rented out does not change, which means that the gains from trade are the same and there is no welfare loss generated by the policy.
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