In the market equilibrium,with a price of $500 there are 2,000 apartments.If the government decides to enact a rent control policy,with a maximum price of $400,it reduces the quantity to 1,500 apartments.Due to the rent control decreasing the total surplus of the market,the policy generates a(n)

Question

Quizplus · Accepted Answer

Rent control policies that limit the maximum price below the equilibrium level lead to a deadweight loss, which is the loss of total surplus that occurs due to the distortion of market outcomes. In this case, the rent control reduces the quantity of apartments supplied, which creates a shortage and increases the waiting time and search cost for tenants. At the same time, some landlords may reduce the quality of their apartments or exit the market, which further reduces the consumer surplus and producer surplus. Therefore, the best answer is (D) deadweight loss. The other choices are incorrect because the policy does not create an excess supply (A), nor does it lead to a higher price (C) since the price is already capped at $400, below the equilibrium price of $500. The policy also does not restore the equilibrium (B) since it interferes with the natural market forces.

In the Market Equilibrium,with a Price of $500 There Are