Question

Both the private sector and the public sector are involved in building houses. In one country, a private firm has built an extra 100,000 houses, but, at the same time, its government has increased income tax significantly. Explain, using a demand and supply diagram, how these two actions would have affected the equilibrium price and the equilibrium quantity of houses.

A) An increase in private housing supply and a rise in income tax can be illustrated in the demand and supply diagram as follows...
B) Show how the increase in private housing supply and higher income tax would impact the equilibrium price and quantity of houses on a demand and supply diagram.
C) Using a demand and supply diagram, illustrate the consequences of increased private housing supply and higher income tax on the equilibrium price and quantity of houses.
D) Demonstrate the effects of increased private housing supply and elevated income tax on the equilibrium price and quantity of houses through a demand and supply diagram.

Answer 1

The increase in private housing supply would typically decrease the equilibrium price and increase the equilibrium quantity of houses. However, the significant increase in income tax would decrease demand, which could raise the equilibrium price and lower the quantity of houses. The final effect on the housing market equilibrium depends on the magnitude of these opposing forces.

Step-by-step explanation:

When a private firm builds an extra 100,000 houses, this increases the supply of houses in the market. On a demand and supply diagram, this is represented by a shift to the right of the supply curve. This shift would typically lead to a lower equilibrium price and a higher equilibrium quantity of houses, ceteris paribus. However, when the government increases income tax significantly, consumers have less disposable income, which in turn decreases their demand for houses. This decrease in demand would be illustrated by a leftward shift of the demand curve. The overall impact on the equilibrium price and quantity will depend on the relative magnitude of the changes in supply and demand. A higher tax can effectively raise the costs of production, which could, in some analyses, be interpreted as a leftward shift of the supply curve instead of a shift in demand.

In summary, an increase in housing supply would normally result in a lower equilibrium price and higher equilibrium quantity. However, an increase in income tax would decrease demand, potentially raising the equilibrium price and lowering the equilibrium quantity, thus partially or fully offsetting the impact of increased supply. The final outcome for equilibrium price and quantity would depend on which effect is stronger—the increase in supply or the decrease in demand.