Chapter 1. Section 5, Problem 1 (Section 2 Macro)

Step 1

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

Question

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.

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Step 2

Question

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Step 3

Question

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It's uncertian if tenants are better or worse off as a result of these policies. 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. For further review see section, “How a Price Ceiling Causes Inefficiency.”

Question

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Landlords are clearly better off as a result of these two policies: more landlords will rent out apartments and will receive a higher monthly rent. For further review see section, “How a Price Ceiling Causes Inefficiency.”
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Question

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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.”
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