posted by Angela on Sunday, May 21, 2017 at 12:33am.
In the market equilibrium, with a price of $500 there are 2000 apartments. If the government decides to enact a rent control policy, with a maximum price of $400, it reduces the quantity to 1500 apartments. Due to the rent control decreasing the total surplus of the market, the policy generates a(n) __________ .
A. excess supply
B. equilibrium
C. higher price
D. deadweight loss
Ans- D
I agree.
yep thats right
To understand why the answer is D, deadweight loss, let's first review the concept of rent control and its impact on the market equilibrium.
Rent control is a policy implemented by the government to restrict the amount landlords can charge for rent. In this case, the government set a maximum price of $400 per apartment.
In the market equilibrium, where there is no rent control, the price of apartments is $500 and there are 2000 apartments available. This means that at a price of $500, the quantity demanded by potential tenants is equal to the quantity supplied by landlords, resulting in a balance between supply and demand.
However, when the government imposes a rent control policy with a maximum price of $400, it reduces the quantity of apartments available to 1500. This decrease in quantity signifies a shortage because the quantity demanded at a lower price is now greater than the quantity supplied.
Now, coming to the question at hand: Due to the rent control policy, the quantity of apartments decreased from 2000 to 1500. This reduction in quantity causes a decrease in consumer surplus and a decrease in producer surplus. The difference between the total surplus (consumer surplus + producer surplus) before and after the rent control policy is the deadweight loss.
In this case, the rent control policy generates a deadweight loss because it reduces the total surplus of the market. Hence, the answer to the question is D. deadweight loss.