Suppose that you are the economic adviser to a local government in Central Ameri

Question

Suppose that you are the economic adviser to a local government in Central America that has to deal with a politically embarrassing shortage of affordable housing that was caused by rent controls that the government recently imposed. Your first suggestion is to get rid of the rent controls. Explain how and why rent controls (price ceilings) distort markets and what are some of the economic effects of rent controls.

Since the politicians are unwilling to get rid of the rent controls, they offer you a list of suggestions to make housing more affordable: 1. Government provided housing 2. Tax deductions to renters 3. Tax breaks to construction companies who provide affordable housing. Explain the costs and benefits of each and which option would you suggest?

Explanation / Answer

Answer:

Suppose I am the economic adviser to a local government in Central America that has to deal with a politically embarrassing shortage of affordable housing that was caused by rent controls that the government recently imposed. Our first suggestion is to get rid of the rent controls.

Rent controls (price ceilings) distort markets – This has distort the market due to high increase in rents in the market and people are expecting high rents from people who are coming to have rent house for their family. The house market in US is such that many people are visitors at US and they cannot purchase the house, so they would like to get the house on rent. So for rent house, there is a high demand. So many local people explored this opportunity and organized houses for rent so that they can earn for themselves easily. But due to high increase in the rents, government has asked to control the rents and government has introduced rent limits that can be imposed. This resulted in low earning for the house owners and they avoided renting their homes on low rents. Thus this created a problem for rent houses in US.

The some of economic effects of rent controls are as below

Low availability of affordable rent houses resulted economic impact on people for affording house.

Slowness in construction industry impacts the economy, because of low demand of house construction, as renting approach is not suitable for people.

Since the politicians are unwilling to get rid of the rent controls, they are offering a list of suggestions to make housing more affordable:

1. Government provided housing – This approach will have large costing impact for government and it will be difficult for the government to manage and ensure adequate administration.

2. Tax deductions to renters – This looks to be the good approach, as it will facilitate the people to get the tax rebate and they will willing to get on rents so that they can save tax money and can easily live their life.

3. Tax breaks to construction companies who provide affordable housing: This does not look good option, because construction companies will explore this opportunities, but will not result any major benefits for the peopleand the whole process will not move as expected.

We would like to select option two - Tax deductions to renters , because this option looks to be more practical and it will benefits the individuals and it will not impose any cost impact to government.

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