Microeconomics
Essay Assignment
Joyce Nebrida

Question 1:
Use supply and demand analysis to show the effect of a (binding) price ceiling in the market for rental properties. * What are the possible negative effects due to this price ceiling?

The possible negative effects of this price ceiling according to supply and demand analysis is that landlords would have less incentive to offer apartments, and so the supply of apartments would drop, causing a persistent shortage of rental housing. This price ceiling would also lead to inefficiency, meaning that the quality of the housing would lower. * What happens to the total surplus (total surplus = consumers’ surplus + producers’ surplus)?

What happens to total surplus when a price ceiling is implemented is deadweight loss. Deadweight loss affects not just consumer and producer surplus, but total surplus. Deadweight loss is the loss in total surplus that occurs when an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity. Wasted resources, inefficient allocation to consumers, and inefficiently low quality lead to a loss of surplus over and above the deadweight loss.

* Why do governments use price ceilings despite these negative effects?

In some places, price ceilings, or rent control on apartments give a small minority of renters much cheaper than they would get in an unregulated market. Also, sometimes when price ceilings have been in effect for a long time, buyers and renters don’t know the difference. Lastly, according to the text, government officials often do not understand supply and demand analysis.

* Who might benefit from this price ceiling?

The people who would benefit from this price ceiling are those in the black market who prey on those who don’t know about the price ceiling, and end up paying way more rent than is