ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A government sets a maximum price for rental housing below the free-market equilibrium rent. What is the most likely immediate result?
A maximum rent set below equilibrium leads to a shortage of rental housing. The lower price raises the quantity tenants demand while reducing the quantity landlords are willing to supply, so demand exceeds supply. A surplus would occur with a binding minimum price instead.
- AA surplus of rental housing as landlords supply more
- BA shortage of rental housing as demand exceeds supplyCorrect
- CNo change, because the market rent is unaffected
Explanation
A binding price ceiling set below equilibrium lowers the price tenants pay, increasing quantity demanded while reducing quantity supplied. Demand therefore exceeds supply, causing a shortage. A surplus would arise from a minimum price above equilibrium.
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