1. How would you characterize the opportunity cost of interest rate deduction (subsidy) for house owners? (Hint: Think about this; What if the government ended interest rate deduction (subsidy) for house owners and used that additional tax money to build public goods like roads, parks, educational institutions, hospitals etc.? How would that affect the demand for housing, demand for apartments, national productivity, income distribution, etc.?) The interest rate deduction offered by the government is an incentive that is usually placed so as to encourage the ownership of homes. It is especially for this reason that the demand for housing towards the new millennium was so…show more content… In this case, the demand for home ownership would reduce and there would be a higher demand for rental ownership. The part-time ownership industry would be on the rise because shelter being a basic need would still require satisfaction. With the urge to own a home dying down due to lack of incentive through the subsidy, the need to shelter would be satisfied through rental schemes and leases. The nature of the opportunity cost would still be related to public service provision and it would allow for better and more efficient provision of services to the populace. The availability of a second option means that non-provision of permanent homes for the public would not adversely affect an individual’s access to shelter.
Analyzing this on a national scale means that it becomes pertinent to assess impact on demand, national productivity and income distribution. The loss of the subsidy means that there would be fewer home owners and a downturn in the real estate industry. This downturn would however be offset by an increase in demand for apartments. Since investments into home markets would marginally reduce, new investments in apartment buildings would provide better returns to the capital owners. In terms of national productivity, the contribution of banks would not be affected since alternative revenue streams would be provided in the apartments sector. The government however, would