California passed a law called "Proposition 2 1/2" that limited property taxes to 2.5 percent of property value.Naturally this reduced taxes on many properties, and apartment landlords had more money at the end of the year at given rents.This windfall could be called an economic rent only if

Question

Quizplus · Accepted Answer

Economic rent can only occur in a situation where the supply of a good or service is limited, and there is excess demand for it. In the case of Proposition 2 1/2, the supply of rental units is fixed, meaning that landlords who benefit from the tax cut are collecting economic rent. Option A is incorrect because the definition of economic rent is not being stretched; it simply applies to this scenario. Option B is incorrect because the ability to expand the supply of rental units would prevent economic rent from occurring. Option D is incorrect because competitors building housing at costs that yield previous returns does not necessarily eliminate the existence of economic rent.

California Passed a Law Called "Proposition 2 1/2" That Limited