Question 22 of 22intermediate🔧 ApplyLong Answer5 marks

Suppose the market determined rent for apartments is too high for common people to afford. If the government comes forward to help those seeking apartments on rent by imposing control on rent, what impact will it have on the market for apartments?

Correct Answer

When the government imposes control on rent, it is implementing a price ceiling, which is a government-imposed upper limit on the price that may be charged for a good or service. Since the market-determined rent is too high for common people to afford, the government fixes the rent below the market-determined price.

When a price ceiling is imposed below the equilibrium price, it creates a situation where the quantity demanded exceeds the quantity supplied. This leads to shortage of apartments in the market, as more people are willing to rent apartments at the lower controlled rent than what landlords are willing to supply.

The price ceiling, accompanied by rationing of apartments, may have several adverse consequences on consumers. First, each consumer has to stand in long queues to get apartments through the rationing system.

Second, since all consumers will not be satisfied by the quantity of apartments they get, some of them will be willing to pay higher prices for it. This may result in the creation of a black market where apartments are rented at prices higher than the controlled rent.

Thus, while the government's intention is to help common people through rent control, it may lead to unintended consequences like shortage, long queues, and black market formation.

Exercise: EXERCISES | Q: 25 | (Page 17)
For More Understanding

Explanation

This question tests understanding of price ceiling as a form of government intervention. The textbook explains that price ceiling is imposed when market prices are too high for necessary items. The key impacts mentioned in the context are: (1) price ceiling is fixed below market-determined price, (2) it leads to long queues as consumers wait for rationed goods, and (3) it creates black markets where consumers willing to pay higher prices do so illegally. The answer integrates these points in an exam-appropriate format.