We can use the same type of analysis to measure the effect of rent control on

# We can use the same type of analysis to measure the

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We can use the same type of analysis to measure the effect of rent control on consumer surplus, producer surplus and economic efficiency. For instance, suppose the city imposes a rent ceiling of \$1500 per month. The below figure can help guide us as we measure the effect. First we calculate the quantity of apartments that will actually be rented by substituting the rent ceiling of \$1500 into the supply equation: Q S =-1000000+ (1300 x 1500)=950,000
We also need to know the price on the demand curve when the quantity of apartments is 950,000. We can do this by substituting 950,000 for quantity in the demand equation and solving for price: 950,000=4750000-1000P P=-3800000/-1000=\$3800 Compared with its value in competitive equilibrium, consumer surplus has been reduced by a value equal to the area of triangle B but increased by a value equal to the area of rectangle A. The area of triangle B is: ½ x (2250000-950000)x(3800-2500)=\$845,000,000 And the area of rectangle A is Base x Height or: 950,000 x (2500-1500)= \$950000000 The value of consumer surplus in competitive equilibrium was \$2,531,250,000. As a result of the rent ceiling, it will be increased to: (2531250000 +950000000)- 845000000=2636250000 Compared with its value in competitive equilibrium, producer surplus has been reduced by a value equal to the sum of the areas of triangle C and rectangle A. The area of triangle C is: ½ (2250000-950000) x (2500-1500) =\$650,000,000..
We have already calculated the area of rectangle A as \$950,000,000. The value of producer surplus in competitive equilibrium was \$1,947,375,000. As a result of the rent ceiling it will be reduced to: \$1947375000-\$650000000-\$950000000=\$347,375,00/ The loss of economic efficiency as measured by the deadweight loss, is equal to the value

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• Summer '17