Econ 5103 Submission Question 3

REPORT OF SUBMISSION QUESTION 3

Catalogue

Background Information        2

Analysis and Report        3

(a)        Price Ceiling        3

(b) Subsidies for Construction        4

(c) Subsidies for Income        5

(d)Increasing Government Construction        6

(e) Increasing the Tax Concession        7

Conclusion and Recommendation        8

Reference        8

REPORT OF SUBMISSION QUESTION 3

Background Information

Set in the condition of competitive market, the quantity and price of supply and demand could be influenced by some factors. And the supply curve and demand curve can be shift downwards or upwards under the influence of some factors as well. To some degree, the policies implemented by the government account for a big proportion of these factors.

Concerning the five question discusses, government is considering five difference policies to increase the availability and affordability of rental accommodations with factors influencing the quantity and price of supply and demand, and shift the supply and demand curves. The factors associated with the policies are introduced briefly as follows:

• Legislated Rent Control by setting maximum levels for rents which acts as a price ceiling that could influence the quantities and prices of supply and demand
• Subsidies for construction of rental properties which could shift the supply curve downwards
• Subsidies for income of renters which could shift the demand curve upwards
• Increasing government construction of rental properties which may shift the supply curve downwards
• Tax concession to investors for their expenditure on rental properties which could shift downwards the supply curve
• The analysis in detail would be stated in the following content.

Analysis and Report

1. Price Ceiling

[pic 1]

As analysis illustrated in the diagram above, this policy sets maximum level of rental price; thus, we have a “price ceiling”. Quantity demanded increased from Q0 to Q2; quantity supplied decreased from Q0 to Q1. Now the maximum price is lower than the market equilibrium price. This created a shortage on the supply of rental properties. At point F, quantity supplied is Q1; at point G, quantity demanded is Q2.

Between Q1 and Q2, we have an excess of demand, which means the quantity demanded is larger than the quantity supplied. At the original market equilibrium, consumer surplus equals the area DP0E, producer surplus equals the area P0BE. When there is a price ceiling, consumer surplus becomes AP1FC, producer surplus becomes P1BF. Thus, this policy created a deadweight loss which equals the area CEF.

(b) Subsidies for Construction

[pic 2]Policy(b) is government granting subsidies on the construction of rental properties. As analysis illustrated in the diagram above, this policy encourages producers to supply more rental properties, which shifts out the supply curve. The market equilibrium quantity increase from Q0 to Q1, and the equilibrium price decreased from P0 to P1. At the equilibrium point E before the policy, consumer surplus equals the area AP0E; producer surplus equals the area P0BE.

Now at the new market equilibrium point E’, consumer surplus becomes the area AP1E’,  and the consumer surplus increased by the area P0P1E’E. Although the new market equilibrium price is P1, the actual price producers get is Pp at point O, because they are getting construction subsidies from the government. The difference between Pp and P1 is the per-unit subsidy. Now the new producer surplus becomes the area BPpO, and it increases by the area PpP0EO. The rectangular area PpP1E’O is the total cost of subsidies granted by the government. In this way, a deadweight loss of area EOE’ is created by this policy.

(c) Subsidies for Income

[pic 3]

Policy (c) is that government grants income subsidies to households who rent. As analysis illustrated in the diagram above, this policy encourages consumers to demand more rental properties, since for a particular price more households have enough money to rent, which shifts out the demand curve. The market equilibrium quantity increase from Q0 to Q1, and the equilibrium price increased from P0 to P1. At the equilibrium point E before the policy, producer surplus equals the area BP0E, while consumer surplus shown by the area AP0E.