Price Ceiling in Rental Accommodations
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Genre: Finance
Why would governments act to establish a binding price ceiling in the market for rental accommodation?
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Price Ceiling in Rental Accommodations

  • Why would governments act to establish a binding price ceiling in the market for rental accommodation?

Governments act to establish a price ceiling in the market for rental accommodation in order to make sure that the rental accommodation is available at affordable rates for the needy and poor people. In the New York City, the United States government acted to establish price ceiling in rental accommodation market so that the soldiers returning from the Second World War would find it easier and affordable to reestablish them (Tucker, William. 1991). The similar policy has been adopted in many other US cities as well and has continued even long after the completion of Second World War. The law has been put in the name of the War Emergency Tenant Protection Act.

  • 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 the introduction of the price ceiling.

Price ceiling is an artificial price fixed by the government above which the producers or the suppliers cannot sell their goods and services. In the rental accommodation market, the tenants or the prospective tenants are the consumers or the customers while the landlords and the builders who build the houses for rental accommodation are the suppliers.

Without a price ceiling, the market finds its equilibrium and this particular point on the demand and supply curve in where the two curves meet. In the diagram depicted below, the point is DWL where the equilibrium demand for rental accommodation Q` and the equilibrium price P` meet each other.

After the price ceiling is applied by the government, the maximum price at which the rental accommodation can be provided is P*. At a lower price P* than the equilibrium price P`, the demand for the rental accommodation increases to Qdem. However, the suppliers are not ready to provide the demanded quantity of the rental accommodation at this price and hence the quantity supplied is less at Q*sup. Q*sup is the quantity where the ceiling price P* meets the supply curve for rental accommodations.

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