
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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5. How Rent Control Causes Inefficiency
Suppose the following graph shows the demand for and supply of flats in a country.
Determine the equilibrium monthly rent and quantity of flats in the absence of price controls. Based on this, use the green triangle (triangle symbols) to shade the area representing consumer surplus at the equilibrium rent. Then use the purple triangle (diamond symbols) to shade the area representing producer surplus at the equilibrium rent.

Transcribed Image Text:Supply
3800
CS w/ Rent Control
3400
3000
PS w/ Rent Control
2600
Deadweight Loss
2200
Demand
1800
0.8
1.6
2.4
3.2
4.0
QUANTITY OF FLATS (Millions per year)
In the presence of the rent control, consumer surplus
by
per year and producer surplus
by
per year. The price ceiling on rent causes
v per year of deadweight loss. Therefore, using total surplus as a
measure of society's well-being, rent control laws
in society's best interest.
Apart from a shortage of rental property, rent controls also lead to other inefficiencies. Consider the following scenario:
MONTHLY RENT (Euros per flat)

Transcribed Image Text:Apart from a shortage of rental property, rent controls also lead to other inefficiencies. Consider the following scenario:
Felix and Janet live in a huge four-bedroom house. The property is rent controlled and there a number of rooms which are rarely used. The last of Felix
and Janet's children moved out of the house three years ago. Larry and Megan live in a small one-bedroom rent-controlled property. It was fine when
they were just married, but now they have a small child with another on the way.
The above situation is an illustration of which of the following rent control effects?
O Reduction in quality of rental property
O Lost gains from trade
O Wasteful lines and other search costs
O Misallocation of resources
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