TOTAL MARKS 20
Governments have on many occasions intervened in the market to establish a binding price ceiling. You are required in answering the following questions to draw upon the experience of at least one government, via an internet and library search, which has instituted a binding price ceiling in the rental accommodation market. Countries that can be researched are India, many states in the USA, Finland, Italy, Malaysia (Penang), United Kingdom and the countries of the Soviet Union (USSR) between 1945 and 1989. 1. Why would governments act to establish a binding price ceiling in the market for rental accommodation?
Price ceiling is a regulation that prohibits any price higher than the standard price given by government. So as to ensure the effectiveness and power of price ceiling in the market, it must be set below the equilibrium market price, which is called the binding price ceiling. It is due to the fact that the binding price ceiling is affected by the force of regulations and is not under the control of market. (Douglas)
There are several of reasons that governments should set up a binding price ceiling in housing market. Firstly, the main purpose of establishing this price is to assist the poor people in renting through setting up a low price which can allow them purchase or rent accommodations. Furthermore, it could become a useful tool for governments to manage their society and economy. In fact, ‘defusing public protest about high rents and providing an agreed framework for contracts’ are also the intended goals of the binding price ceiling (globalpropertyguide). For example, India is a developing country and still has many of poor. Thus, the government applies the Lease Agreements based on the rent control law to guarantee housing for their citizens. The local government have the right to create the formula to calculate the amount of rent. In Delhi, 10% of the construction cost and the market price of the land according to the historical value is the maximum annual rent. The law only authorizes the landlords to increase a small part of the amount of rent when they improve the property (globalpropertyguide). http://www.globalpropertyguide.com/investment-analysis/The-pros-and-cons-of-rent-control 2. Describe, using diagrams where appropriate, the market for rental accommodation before and after the introduction of rent controls. Illustrate the surpluses accumulating to producers and consumers before and after and any dead weight loss after the introduction of the price ceiling.
In the competitive market, prior to applying the rent control policy, there are two situations that may occur. Firstly, the number of housing demanded equals to the number of housing supplied at the equilibrium level. In that situation, in the rental market, the shortage or surplus of accommodations is not happened (Douglass). The second situation is that price tends to increase, which affects the demand decrease. However, the rise in price is the opportunity for landlords supplying more houses. For example, in New York, there were approximately 30,000 houses constructed in a year and especially, 90,000 houses in the peak years before the price ceiling introduced. (GOOFLE)
After applying the rent control, the demand begins to increase dramatically in the rental market. However, this increase do not affect the supply positively, the quantity of housing supplied decreases. In New York, after introducing this policy, the number of new house built reduced considerably to 10,000 in the peak year (GOOFLE).
In brief, consumer surplus is the difference between the price consumers must pay and the amount they are willing to pay for a product or services. Producer surplus is also the difference between the amount of money producers want to earn and the price they must sell or lease their products. Based on the diagram above, before the introduction of rent