(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
In the first part of the problem, you were asked to analyze the impact of removing a rental control from housing market in Ney York City, in particular, how will removing the rental control affect the quantity supplied and the quality of rental units?
(Description)
The following text is shown on the slide:
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.
a. What effect will the elimination of the rent control have on quantity and quality of rental housing supplied?
(Speaker)
We are going to start by drawing a basic supply and demand diagram with the rental price on the vertical axis and the quantity of rental units on the horizontal axis.
(Description)
The horizontal axis and the vertical axis are drawn. The horizontal axis is labeled as Quantity of Rental Units, no units are given. The vertical axis is labeled as Rental Price, no units are given.
(Speaker)
The demand line for rental units is downward sloping.
(Description)
A straight line sloping downward from the left upper corner to the right lower corner of the plot is drawn. It is labeled as Demand.
(Speaker)
The supply line of rental units takes the traditional upward slope.
(Description)
Another straight line sloping upwards from the left lower corner to the right upper corner of the plot is drawn. It is labeled as Supply.
(Speaker)
We're going to label the equilibrium price, P, and the equilibrium quantity, Q.
(Description)
The lines Demand and Supply intersect at the point with coordinates, Q and P.
(Speaker)
Next, we are going to look at the impact a price ceiling initially has on the rental market.
(Description)
A line parallel to the horizontal axis is drawn. It is located below the equilibrium price point with coordinates, Q and P. It is labeled as Price Ceiling. This line intersects with the vertical axis at point, P subscript C.
(Speaker)
A binding pricing ceiling sets the market price below the equilibrium price. We can see the price ceiling or rent control will cause the quantity supplied of rental units to decrease and the quantity demanded of rental units to increase.
(Description)
The Price Ceiling line intersects with the Supply line at the point with coordinates, Q subscript 1 and P subscript 1, and with the Demand line at the point with coordinates, Q subscript 2 and P subscript 1.
(Speaker)
It's worth pointing out that the rental controls often lead to a lower quality of housing. Setting the price below equilibrium creates a shortage of housing units and discourages building owners from making the necessary improvements. Rental control apartments are often run down.
By removing the price ceiling, the market will return to the original equilibrium, both price and quantity will increase.
(Description)
The Price Ceiling line is removed from the plot.
(Speaker)
This will also encourage building owners to improve the units to attract more renters.