Question

An effective rent ceiling

A) increases consumer surplus.
B) increases producer surplus.
C) creates a deadweight loss.
D) decreases the supply of housing.
E) increases the supply of housing.

Answer 1

An effective rent ceiling creates a deadweight loss by preventing some mutually beneficial transactions from occurring, leading to a loss of welfare in the housing market. It transfers producer surplus to consumers but also causes a housing shortage and can lead to a decrease in housing quality.

Step-by-step explanation:

An effective rent ceiling will indeed transfer some producer surplus to consumers and can increase consumer surplus as it lowers the price below the market equilibrium. However, this situation typically leads to a shortage of housing, as the quantity demanded exceeds the quantity supplied at the rent ceiling price. Most importantly, a rent ceiling creates a deadweight loss because it prevents some mutually beneficial transactions from occurring, as some people who would be willing to pay more than the ceiling price are unable to find housing. This results in a loss of welfare in the market as a whole. Additionally, rent ceilings can lead to a deterioration in the quality of housing as landlords may not have sufficient incentive to maintain or improve their property.