Final answer:
Consumer surplus with rent controls is the difference between the maximum price a consumer is willing to pay for a good and the lower price they actually pay due to the controls. It leads to an increase in consumer surplus but can cause a deadweight loss and reduce total surplus (consumer and producer surplus combined).
Step-by-step explanation:
The concept of consumer surplus with rent controls refers to the difference between the maximum price a consumer is willing to pay for a good, based on their preferences, and the actual market price they pay when rent controls are in place. Specifically, the correct definition is: Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good and the actual price they pay with rent controls. Therefore, the right answer to the question is option 1.
Rent controls act as a price ceiling in the housing market, often leading to a lower market price for rent than what consumers would be willing to pay at equilibrium. This creates an increase in consumer surplus, as consumers pay less for housing than their maximum willingness to pay. However, this can also result in a deadweight loss as it may block transactions that buyers and sellers would be willing to make at equilibrium, thereby reducing total surplus which includes both consumer surplus and producer surplus. It's important to note that while rent controls can increase consumer surplus, they may have unintended consequences such as reduced housing quality or quantity.