Answer to Question #53456 in Economics of Enterprise for Junaid

Question

3. The Municipal Corporation of a small college town decides to regulate rents in order to reduce student living expenses. Suppose the average annual market-clearing rent for a two bedroom apartment had been Rs.10000 per month, and rents were expected to increase to Rs.15000 within a year. The Municipal Corporation limits rents to their current Rs.10000-per-month level. Draw a supply and demand graph to illustrate what will happen to the rental price of an apartment after the imposition of rent controls. Do you think this policy will benefit students? Why or why not?

Answer 1

The Municipal Corporation of a small college town decides to regulate rents in order to reduce student living expenses. Suppose the average annual market-clearing rent for a two bedroom apartment had been Rs.10000 per month, and rents were expected to increase to Rs.15000 within a year.
If the Municipal Corporation limits rents to their current Rs.10000 per-month level, then the rental price of an apartment after the imposition of rent controls will be the same, but according to the existence of price floor there will be a shortage, as the demand will exceed supply for the apartments. I think this policy will benefit only such students, who will rent the apartment, but the other students according to the shortage will be without a place for a living.