Maximum price- a price set by the government below the equilibrium price which firms cannot legally go above.
To prevent firms using market power to increase market prices to make above normal profit.
To make products affordable for low income earners.
Price is now lower, real income are going to increase, benefiting our lower income earners the most.
However, at Pmax there is now a lower supply of rented accomodation, meaning that less people are able to live in NY as a result. Fall of supply from Q to Qs.
Qs consumers will benefit from the intervention (P falls to Pmax) but Qs-Qd now live elsewhere.
Who gets to live in NY/ who are those that consume Qs?
First come, first serve/ queuing system → quickest to consume benefit, others don’t.
Based on need → give housing to those on low income/ benefits.
Parallel markets → people renting illegally, usually at higher price.
Revenue falls from P*Q to Pmax*Qs.
Potential unemployment.
The government must intervene further to remove the excess demand in the market.
Solutions: Option 1- subsidy - the government can provide a subsidy to icentivise more supply in the market.
Pmax is maintained and everyone that wants accommodation gets it (Qd).
However very expensive for the government.
The subsidy also helps rich and poor alike, is this a good use of government spending? Opportunity cost?
Option 2 - Segregate market
The subsidised price is only available to the people that need it, i.e. richer consumers pay the higher price.
Does this create an incentive to lie about income?
How do we decide the threshold?
Option 3 - Direct provision by the government.
The government builds and rents out apartments themselves, shifting supply right to S1, new equilibrium S1 = D
Government is successful in helping people afford housing.
But this could take time to provide if not enough built already.
This will cost the government a lot of money to provide; opportunity cost exists.
However, the government does recieve rent from tennants, increasing government revenue (Qd -Qs) * Pmax
Another issue → government provision is often inefficient - are those it is aimed at the only that benefit?
Society is better off, lower prices and higher quantity.
Improved equity and economic wellbeing
Maximum prices
Maximum price- a price set by the government below the equilibrium price which firms cannot legally go above.
To prevent firms using market power to increase market prices to make above normal profit.
To make products affordable for low income earners.
Price is now lower, real income are going to increase, benefiting our lower income earners the most.
However, at Pmax there is now a lower supply of rented accomodation, meaning that less people are able to live in NY as a result. Fall of supply from Q to Qs.
Qs consumers will benefit from the intervention (P falls to Pmax) but Qs-Qd now live elsewhere.
Who gets to live in NY/ who are those that consume Qs?
First come, first serve/ queuing system → quickest to consume benefit, others don’t.
Based on need → give housing to those on low income/ benefits.
Parallel markets → people renting illegally, usually at higher price.
Revenue falls from P*Q to Pmax*Qs.
Potential unemployment.
The government must intervene further to remove the excess demand in the market.
Solutions: Option 1- subsidy - the government can provide a subsidy to icentivise more supply in the market.
Pmax is maintained and everyone that wants accommodation gets it (Qd).
However very expensive for the government.
The subsidy also helps rich and poor alike, is this a good use of government spending? Opportunity cost?
Option 2 - Segregate market
The subsidised price is only available to the people that need it, i.e. richer consumers pay the higher price.
Does this create an incentive to lie about income?
How do we decide the threshold?
Option 3 - Direct provision by the government.
The government builds and rents out apartments themselves, shifting supply right to S1, new equilibrium S1 = D
Government is successful in helping people afford housing.
But this could take time to provide if not enough built already.
This will cost the government a lot of money to provide; opportunity cost exists.
However, the government does recieve rent from tennants, increasing government revenue (Qd -Qs) * Pmax
Another issue → government provision is often inefficient - are those it is aimed at the only that benefit?
Society is better off, lower prices and higher quantity.
Improved equity and economic wellbeing