Imposing rent control as a response to concerns about

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Imposing rent control as a response to concerns about market power is probably not justified Housing subsidy programs Targets low-income groups May serve 2 possible goals: 1. Raise low income households’ utility 2. Reduce negative externality associated w/existence of areas of substandard housing in city Non-poor housing subsidies may be willing to pay taxes in support of housing subsidies for slum reduction Magnitude depends on the increase on low-income housing consumption; utility effect depends on both housing and bread consumption Housing subsidy analysis Figure 7.3 C = bread consumption ; p = price per unit of housing ; y = income of low-income housing Budget constraint of low-income household is C + pq = y Solving for q, rewritten as q=y/p - c/p Q on vertical axis, c on horizontal axis Slope of budget line is -1/P, C intercept is y (x axis) Tangency b/t indifference curve and budget line Q 0 is low, corresponding to slum dwelling Subsidies
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1. PRS: Proportional Rent Subsidy a. Gov pays fraction 𝛃 of household’s rent (pq) b. Budget constraint now written as c + (1- 𝛃 )pq = y, with (1- 𝛃 )py representing household’s portion of its rental cost c. Slope of budget line changes from -1/p to -1/[(1- 𝛃 )p] (more negative value) d. New level of housing consumption is P qrs e. New tangency is above previous tangency (bc this leads to increase in housing consumption) f. Shifts line in a steeper, higher y-axis value, same x-axis value, new tangency 2. IG: Income Grant a. Fixed to income and not tied to housing b. Budget constraint is c + pq = y + G c. Shifts budget line outward in a parallel fashion d. IG budget line must pass through the PRS consumption point (passes through PRS and IG point) e. See figure 7.4 f. Higher utility for low-income household, higher indifference curve than under PRS program g. Slum reduction effect is greater under PRS program, q prs > q ig 3. HV: Housing Vouchers a. Vouchers like “reverse food stamps” usable towards housing but not ‘bread’ b. Dollar value of vouchers match cash amount of G under IG program (point is on same line as IG) c. Is on upper portion of IG line; dashed line to the right of HV point is INACCESSIBLE d. See figure 7.5 e. Outcome is between PRS and IG programs f. q prs > q hv > q ig g. IG and HV could lie on same point (solid line part of graph) 4. PH: Public Housing a. Gov builds housing unit larger than original, offers it to household below-market rent b. Receives dwelling rather than financial transfer c. Household pays rent to gov, supplements it with addition amount g, builds larger dwelling d. SAME RENT PAID FOR NEW DWELLING FROM GOV e. Vertical movement upward from original consumption line moves exactly to IG budget line f. If gov is inefficient housing producer (as many believe), PH point will be below IG line g. P ph > q prs > q hv > q ig h. Largest slum reduction, smallest utility increase Rankings of slum reduction and utility increase are inverse from each other Slum reduction: q ph > q prs > q hv > q ig Utility increase: q ph < q prs < q hv < q ig
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