Hypothesized case on

Government Intervention in
the Market
The Case

Overheated market putting housing out of reach of customers.

Who bears the heaviest cost when rentals are kept down by –

(a) Rent controls

(b) Subsidy to tenants equal to some fraction of rent.

(c) Low-cost public housing

Introduction
a) Rent control:

• maximum price set by the government.

• form of price ceiling.

b) Rental Subsidy:

• cash benefit to citizens, form of consumer

subsidy.

c) Low Cost Public Housing:

• building house with lower rent,

• create competition to keep rent low

Why Governments Intervene In
Markets?
 Maximizing Social Welfare

• monopolistic market

• high entry costs

 Macro-Economic Factors

• naturally occurring economic events like recessions and inflation

 Socio-Economic Factors

• Promote economic fairness.

• reallocate financial resources

Housing Market after "Rent Control”

 Equilibrium E Price
300$

 Govt. lowers price

to 200$

 Supply curve shifts

to right.

 New equilibrium E’
 Companies
getting less
money after the
rent control.
Loss of Landlords

 Before: 300$
Over

 After: 200$ Production

 Following E’ will
result in over
production

 Companies or landlords wont be overproducing if they get paid less.

 Equilibrium
changes to
E’’.

 Creates Black
market.

 Creates
shortage

 Creates More
overpriced
market
 Short run =
Producers pay
heaviest cost

 Long run =
E’’
Customers pay
heaviest cost.

 DWL =

6, 7, 8, 9, 10, 11.

Before Rent Control After Rent Control Change ∆

Consumer Surplus +1 +2 +6 (Area) +1 +2 +3 (Area) +3 -6 (Area)

Producer Surplus +4 +3 +7 (Area) +4 +5 (Area) +5 -3 -7 (Area)

Housing Market after “Rental Subsidy”

 Benefit given to individual, business or

institution by government.

 Usually in form of cash payment or tax

reduction.

 To remove burden

 Considered to be in overall interest of

public.

 Promote social good or economic

policy.
 Market Demand Curve

 = DD

 Market Supply Curve

• = SS

 At Market Equilibrium
E:

• Price = R2

• Quantity = Q1
 Govt. introduce subsidy
= R3 –R1

 New Demand curve =

DD’

 Customers pay = R1

 Customers Gets subsidy

benefit = (R2 – R1)

 Producers Gets subsidy

benefit = (R3 – R1)
  DWL = 7,8,9

 Everyone is better off

except the taxpayers who
fund the rental subsidy
project and bears the
heaviest cost.

Before Rental After Rental Subsidy Change ∆ Situation

Subsidy
Consumer +2 +3 (Area) +1 +2 (Area) +1 -3 (Area) Better off
Surplus
Producer +4 +5 (Area) +3 +4 +5 +6 (Area) +3 +6 (Area) Better off
Surplus
Housing Market after ‘Low-cost Public Housing’

 Market Equilibrium = E

 Govt. introduces low cost

housing.

 Supply curve shifts = SS’

 New Equilibrium = E’

 Lowers price = R3

 Companies would get R5

if they invested instead
govt.
  Producers bears the heaviest
cost, because they have to keep
housing price low to keep up in
the competition.

Before Low-cost After Low-cost public Change ∆ Situation

public housing housing

Consumer Surplus +1 (Area) +1 +2 +5 +6 (Area) +2 +5 +6 (Area) Better off

Producer Surplus +2 +3 (Area) +3 +4 +7 (Area) -2 +4 +7 (Area) Worse off

Conclusion

 Housing is a basic right.

 Affordable housing affects the social objectives of general people as –

• Health

• Well-being

• Community cohesion

• Crime