Case study 1 PDF

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Magdalines Microeconomics Class. This is the first case study for a group of two with our answers. ...

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Microeconomics Case Study #1: Rent ceiling in Sweden due date: October 14, 2018 (Sunday, midnight) Worth 5% of your final mark TEAM MEMBERS (fill out participating member names): Team Member 1 Team Member 2 INSTRUCTIONS: ● ● ● ● ● ● ● ● ●

Carefully read and understand the attached scenario. Use the concepts and understanding covered in Chapters 2 and 3 Discuss scenario with group members and fully understand together. Come to a consensus as to what your group should include in your answers. Each member is expected to be able to explain the group’s solutions. Present the answers in a word document (indicate members’ names). Embed photos (or screen shots) of your own supply-demand diagram that you used to analyze the effects of rent ceiling (rent control) Work in teams of two. One partner is to UPLOAD your work to D2L with both names on it, by the due date indicated above. Upload your work to D2L. Assessments>Assignments>Case study #1

Rent ceiling in Sweden The main justification for introducing a rent ceiling is the right to housing. A low rent price it is believed to make housing affordable for poor people. Unfortunately, as outlined in the analysis in Chapter 3, the introduction of a rent ceiling may have perverse effects and poor people may not be able to get a cheap house anyway. A very interesting example of a rent control policy is the one of Sweden. In Sweden rent price is kept particularly low. A study made by the European University Institute (EUI) showed that: a) To make a 5% return on investment, a Swedish developer would need to set rents 70% higher than allowed by the rent control. b) Rents are little influenced by location, so that metropolitan units are specially underpriced. The result of this rent control system in Sweden was a reduction in the supply of new properties intended for rental in the market. Of the approximately 30,000 dwellings completed in 2006, only 36% were intended for rental. In comparison, from 1990 to 1996 more than 50% of new dwellings completed were intended for rental. This result is consistent with the analysis we have just made. A price ceiling below the market equilibrium price has the effect of reducing the quantity supplied. This creates a shortage of rental units. Furthermore, a rent ceiling may have even more perverse effects. Rent control may discourage landlords from maintaining and repairing units during the tenancy. In some cases, landlords collect key money to offset the losses associated with a low rent. This implies that those willing to pay higher deposits will get the rental unit, thus eliminating the positive effect of rent control on poor people. Source: Adapted from Prince Christian Cruz The pros and cons of rent control, available online at http://www.globalpropertyguide.com/investment-analysis/The-pros-and-cons-ofrent-control

Questions on Case Study 1 1. Explain what is a rent ceiling (rent control) and what are its effects (if it is set below the equilibrium rent) in the housing market. (2 marks) Use and present your own supplydemand diagram to analyze the effects of rent ceiling. Show and explain the effects of rent ceiling using the diagram you created. (2 marks) -

Rent ceiling is a form of rent control set by the government, putting a price limit on how high rent prices can go in a specific area. If the rent ceiling is set below the equilibrium, the quantity demanded will exceed the quantity supplied and there will be a shortage of available spaces.

2. Explain the consequences of the imposition of rent ceilings on rented property in Sweden. (2 marks) The implement of the rent ceiling in Sweden has created a lot of issues for landlords especially. The law does not allow the landlords to have much (if any) control over the price setting. Since the landlords are losing money, due to not having much (if any) control over the pricing, it demotivates them and they are unwilling to supply more houses or to renovate the present house(s) on rent. Many of the landlords decide to not put their houses on rent because they find no point in doing so, since they are not gaining much profit. The tenants are affected negatively by this, since there is a shortage of rental units due to increase in demand and a decrease in the quantity. Many of the people looking for houses have to end up living on the street because of either they are unable to find an available place to rent or because the landlords charge a large deposit fee, that the poor people are unable to afford. 3. Discuss why a rent ceiling can create an unfair outcome in Sweden’s housing market. (2 marks)

When the maximum price for housing is set so low by the government, people will start to demand more than what is being supplied. At the same time, suppliers will be demotivated and will not produce as many houses or will not set them for rent, because they will not be making any profit(If any) on them. This will cause a shortage of available apartments in the area. As a result of low profit opportunities, Landlords will opt to create a very high deposit fee that only a select amount of people can afford, thus eliminating the very purpose of the rent ceiling in the the first place, which was to create affordable housing for poorer people....