Critical Thinking in Economics, Essay Example

One consequence of rent control is a shortage of apartments, which is shown in the figure. Suppose rent control also leads to a reduction in the supply of affordable apartments. Use the figure on this page to illustrate the effects of a reduction in supply, and explain what will happen to the shortage of apartment.

As shown in the diagram, one of the main effects of a price ceiling is a mismatch between supply and demand for apartments; that is, demand for apartments outstrips supply due to a lower price clearing the market. This analysis takes account of the aggregate number of apartments available at the average price in the neighborhood. If one extends this analysis to affordable apartments (there is a reduction in the supply of affordable apartments) this will initially aggravate the existing gap between demand and supply- that is, there will be even more demand (shifting it to the right) and the supply curve will shift in. Overall, the shortage of apartments will increase as a result of this issue.

One reason some economics are critical of rent control laws is that they create a deadweight loss. Using the figure on this page, identify the area representing the deadweight loss. What causes the deadweight loss? What would the supply curve have to look like for the deadweight loss to equal zero?

Deadweight loss is essentially the loss to society due to inefficiencies in a particular market- in this case, the government’s decision to put a price ceiling on a certain number of apartments. In order for the deadweight loss to be zero, the price floor would have to be abolished and the apartment equilibrium price of $2,318.00 would need to be reinstated. The approximate area of the deadweight loss would be between the equilibrium without the price ceiling and the supply curve with the price ceiling as it moves towards the equilibrium price.