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Chapter 3: Problem 3

In the chapter, you learned that one way the government enforces agricultural price floors is to buy up the excess supply itself. If the government wanted to follow a similar kind of policy to enforce a price ceiling (such as rent control), and thereby prevent blackmarket-type activity, what would it have to do? Is this a sensible solution for enforcing rent control? Briefly, why or why not?

Short Answer

Expert verified
If the government wanted to enforce a price ceiling akin to how it imposes a price floor, it might need to supply the shortage of goods/services at the controlled price. However, whether this is a sensible approach or not is subjective and depends on a variety of factors, including economic considerations, political acceptability, and the details of the market and policy implementation.

Step by step solution

01

Understanding Price Floors and Ceilings

To start with, remember the difference between price floors and price ceilings. Price floors set a minimum price that can be charged for a good or service. Typically, the government buys up any surplus of the good at this specified price. Conversely, a price ceiling sets a maximum price. In the context of rent control, this would mean a maximum rent that can be charged.
02

Applying Floor Mechanisms to Ceilings

The exercise asks what would happen if the government enforced a price ceiling in a similar way to how it enforces price floors. This would have the government supplement any shortage of housing at the controlled rent by providing the excess demanded at that price.
03

Assessing Sensibility

Next, assess whether this is a sensible solution for enforcing rent control. This highly depends on the context and involves economic and political considerations. Economically, this method could be seen as inefficient, as it may induce overconsumption and potentially creates a burden on the government's budget. Politically, however, it might be more acceptable if it ensures affordable housing for a larger number of people. Be aware that there's no objectively correct answer; it largely depends on the value judgments one makes in comparing the trade-offs. Don't forget that the specifics of the market and the policy's implementation details would play a considerable role as well.

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