Fig. 1 shows the local rental market in a UK coastal town. In 2019, the government introduced a maximum monthly rent of £700 for newly advertised flats. The...
Question 1 Report
Fig. 1 shows the local rental market in a UK coastal town. In 2019, the government introduced a maximum monthly rent of £700 for newly advertised flats. The policy was intended to help low-income workers whose housing costs had increased faster than income. The price ceiling is shown below the market equilibrium price, Pe. Some landlords have stated that repairs and new construction will be less profitable. A tenants' group argues that the policy is needed because the quantity of affordable housing is too low.
(a) Which condition shown in Fig. 1 indicates that the £700 maximum rent is binding? [2]
(b) Define a price ceiling, using the government policy in this market as context. [3]
(c) Explain one likely effect of this rent ceiling on the quantity and quality of rental housing supplied. [3]
Answer Details
(a) The £700 rent ceiling is binding because it is set below the equilibrium rent, Pe. [1] At this rent, quantity demanded exceeds quantity supplied, shown by Qd being greater than Qs. [1]
(b) A price ceiling is a legal maximum price or rent [1] set by government [1] below the equilibrium market price. [1] Here, the maximum monthly rent is £700.
(c) The lower rent reduces landlords' revenue and profit. [1] Some landlords may withdraw flats from rental or avoid building new flats, reducing the quantity supplied. [1] They may also spend less on repairs, reducing rental-housing quality. [1]
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