Economics For Today

10th Edition
Publisher: Cengage Learning
ISBN: 9781337613040



Economics For Today

10th Edition
Publisher: Cengage Learning
ISBN: 9781337613040
Chapter P2, Problem 7KC
Textbook Problem

Rent controls create distortions in the housing market by

  1. a. increasing rents received by landlords.
  2. b. raising property values.
  3. c. encouraging landlords to overspend for maintenance.
  4. d. discouraging new housing construction.
  5. e. increasing the supply of housing in the long run.

To determine

 The distortion created by rent control in the housing market.

Explanation of Solution

Equilibrium in the market is obtained at the intersection of the demand and supply curves in economy. At this point, there will be no excess demand or supply in the economy. Even when there is an excess supply or demand, the price will change and correct the excess situation back to equilibrium.  Rent control is the setting up of a limit the house owners can charge as rent for their buildings.

Option (d):

When the government imposes a rent control, the equilibrium market rent will not be effective when the rent determined by the government is lower than the market price. The landlords cannot charge a higher rent than the decided level and that means there will be no new construction of houses for renting purpose when there is a rent control in economy. Thus, option 'd' is correct.

Option (a):

When the rent control is introduced, the determined rent rate will be lower than the market equilibrium rate. This means that the control decreases the amount of rent received by the landlords when there is no control...

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