Chapter 1. WIO_Krugman_Chapter5

Step 1

Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.

Suppose it is decided that rent control in New York City will be abolished and that market rents will now prevail. Assume that all rental units are identical and so are offered at the same rent. To address the plight of residents who may be unable to pay the market rent, an income supplement will be paid to all low income households equal to the difference between the old controlled rent and the new market rent.

Question

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Step 2

Question

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Step 3

Question

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Landlords are clearly better off as a result of these two policies: more landlords rent out apartments, and at a higher monthly rent. It is not clear whether tenants are better or worse off. Some tenants who previously could not get apartments can now do so, but at a higher rent. In particular, those tenants who do not receive the income supplement and who used to rent cheap apartments under the price ceiling are now worse off. Society as a whole is better off because the deadweight loss caused by a price ceiling has been eliminated: there are now no missed gains from trade. For further review see section, “How a Price Ceiling Causes Inefficiency” (Please link to section in ebook)
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Step 4

Question

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It is likely that tenants who currently live in rent controlled housing are better organized than people who cannot currently find rental housing. And more organized groups can generally exert greater influence over city policy. For further review see section, “So Why Are There Price Ceilings?”
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