Rent Control: A Price Control with Dead Weight Loss and Inefficiency in the Market


Added on  2019-09-25

6 Pages1352 Words284 Views

Price control1Rent control is the same concept like price ceiling in which maximum price of the good is set by the government to provide goods at the lower price and thus create a shortage of that good. As a result, there will be inefficiency in market and quantity supply is less than the quantity demand. Similarly, rent controls prohibit prices from rising above politically determined levels. Thus as a result suppliers don't want to supply at lower prices and create the shortage in a housing market, on the other hand, at this lower price quantity demand is greater than relative quantity demanded.It is mainly a price control which limits the amount of rent for the property owner in charge for renting out an apartment, home, or other real estate. It acts as a price ceiling in order to prevent high amount of rent from tenant. The aim of rent control regulations is to limit the amount of rentwhich can be spent on renting real property. The amount of rent varies according to the type of property which can be afforded by the renters. The rent regulations scheme allows the owners to fixed rate or charge certain amount according to the rate of inflation. In the above diagram, P (m) is the rent control by government, Q(s) is the quantity supply of rented housing, Q (d) is the Quantity demanded at Maximum rent set by the government. Although the equilibrium point without rent control is P (e). The area from Q(s) to Q (d) shows the shortage of rented property.Dead weight loss under rent control

Price control2As there is dead weight loss in price ceiling, there is also dead weight loss in rental control. Thus, the loss to landlords and tenants is not completely redeemed by the gains of the benefiting tenants, resulted in net loss and inefficiency in the marketIn the above diagram, area B+C is the dead-weight loss create by Rental control by government. Area B is the loss of tenant due to fall in supply of apartments whereas Area C is the loss of landlords due to fall in rent.Equity reason between price ceiling and rent control Government sometime implement the price controls, which are legal minimum or maximum prices for specific goods and services, in an attempt to manage the economy by direct intervention. There are two types of price controls: price ceilings and price floors. A price ceilingis the legal maximum price for a good or service, while a price floor is the legal minimum price. When there is an unregulated market or the free market, then there is the balance between supplyand demand. Due to a price ceiling, there is a shortage of goods in the economy because the legalprice is set below the market equilibrium price, at this price supplier is willing to supply less

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