Eocon 7

ASSESSMENT 7
“…the division between the ‘haves’, who own houses, and the ‘have-nots’, who do not, has been one of the most prominent market failures in the UK housing market” (Extract C, lines 10 –12). In the light of this statement, evaluate the case for and the case against government intervention in the housing market in order to correct or to reduce market failures in such a market. (25)
Market failure occurs whenever the market mechanism or price mechanism performs badly or unsatisfactorily, or fails to perform at all. This is causing an inequality within the distribution of wealth within the UK and therefore the consumers on higher income are buying more extravagant housing causing a higher market price for housing.
One way in which the government could intervene is through subsidies from the government. The government can provide subsidies to the suppliers of the housing market to increase the output produced.

As shown on the diagram a subsidy will shift the supply curve to the left. This is because the quantity of houses supplied will increase from Q1 to Q2 and then price would also decrease from P1 to P2. This will make it more affordable for the have not’s to purchase homes. The disadvantage of subsidies is the opportunity cost; the money provided by the government for housing could be spent elsewhere for example on the NHS in the UK as this causes billions of pounds a year.
Another strategy the government could use is to have a maximum price on rented accommodation. This will cause a decrease in demand as landlords will not purchase excess housing meaning housing is more affordable.

If the maximum price on rent is introduced which is below the free market equilibrium, this will reduce the price of rent. The problems with this strategy by the government are that landlords will stop supplying houses for rent because their rent income